Weekly Commentary, 7/5/16 – 7/8/16
U.S. equities were propelled higher last week entirely by Friday’s action following the Bureau of Labor Statistics monthly employment report. The S&P 500 closed the week at 2129 (+1.28%) with 493 of its constituents advancing. The index now stands just shy of its all-time closing high of 2130. It was a solid week for the other major indexes as well. The Dow Jones Index rose 1.1% with all 30 of its components advancing. The Russell 2000, a small cap benchmark, climbed 1.78% and the tech heavy NASDAQ added 1.94%. One of the stronger sectors was consumer discretionary gaining 2.27%.
The stronger than expected non-farm payroll number helped alleviate concerns that the economy was losing steam but mainly offset the previous month’s very weak release. Averaging the last three months numbers suggest the Federal Reserve will refrain from raising rates at least through 2016. The yield on the 10-year U.S. Treasury note fell to a record 1.36%. Also impacting U.S. interest rates is central bank buying to stabilize markets following BREXIT driving government global bond yields into negative territory leaving U.S. debt one of the more attractive investment options.
It is very difficult to imagine one would see record highs on stocks and record lows for long term U.S. Treasury yields on the same day.
Since the S&P 500 established an all-time in May 2015 at 2130 we have written frequently about the 2100-2130 level on the S&P 500 providing a significant resistance area. According to the Bespoke Investment Group, the S&P 500 has crossed above the 2100 level for the 25th time in its history since it first crossed above in February 2015. The S&P 500 has never closed above 2,100 for more than 14 straight trading days, and in each period where the index crossed and closed above that level, the median number of days it was able to stay above 2,100 was just two trading days. Only time will tell if the 26th attempt to for the S&P 500 to cross 2,100 is the Rubicon and the beginning of another leg in the bull market.
Technically the market is now in a stronger position than many prior attempts. Stadion’s measures of the market internals (or breadth) have been improving. The S&P 500 advance-decline line continues to set new highs. It is encouraging to see small cap indexes outperforming the larger cap indexes and sectors such as consumer discretionary outperforming. All the major indexes are trading above their 50 and 200-day moving averages.
The Cautionary Note: Lingering Negative Overhang
Fundamentally, of course, things look a bit cloudy still. Recent economic data has come in strong including manufacturing and the unemployment report. Valuations are mixed depending on what measurement tools (GAAP vs non-GAAP) one uses. Corporate earnings reports for the second quarter will begin rolling out next week. According to S&P Global Market Intelligence, S&P 500 company earnings are forecast to be down -5.1%. Almost two weeks away from the BREXIT result and we are left with more questions than answers.
The recent improvement in the Stadion risk indicators has moved the offensive team to the field. Should the market struggle near the current highs and reverse lower our ongoing risk management will gradually hand the ball to the defensive team seeking to protect clients from severe market declines. If this turns out to be the conclusion of a rolling 2 year sideways correction and the first leg of a new bull market we are well positioned to participate.
The Stadion Managed Accounts risk objectives are managed using a “core/satellite (Flex)” approach. The core positions will comprise 40-60% of the portfolio and are invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk averse as the risk tolerance of each fund changes. In allocating the objective’s Flex assets (the remaining 40-60% of each portfolio), Stadion uses a proprietary, rules-based weight-of-the-evidence model. With the improvement in the market technicals the weight of the evidence signaled an increase in equity exposure. The portfolios are in overweight their respective benchmark equity allocation at this time.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The Nikkei 225 is a price-weighted stock market index for the Tokyo Stock Exchange and is the most widely quoted average of Japanese equities. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The Sharpe ratio measures the excess return per unit of deviation, or risk. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.