May-June 2015 Market Update

Here are a few interesting facts related to the markets so far this year (source: BTN Research).

The S&P 500 is up +3.2% YTD (total return) through the end of May. The stock index has set 10 all-time record closes this year even though the split between “up” days and “down” days through 5/29/15 was 46/54, (i.e., more “down” days than “up” days).

The best performing individual stock YTD in the S&P 500 gained +83% through the end of May. The worst performing individual stock YTD in the S&P 500 lost 38%.

The # 1 performing stock in the S&P 500 during 2014 has fallen 12.4% YTD through May, while the # 500 performing stock during 2014 has gained +2.8% YTD.

The 3 summer months (June-July-August) have produced an average loss of 0.3% (total return) for the S&P 500 stock index over the last 25 years(1990-2014). However, the stock index has been up the last 3 summers (2012-13-14), gaining +7.9% during the summer of 2012, +0.7% during the summer of 2013 and +4.7% during the summer of 2014.

As always, please click on the Economic & Market Commentary of our site for links to more in-depth updated outlooks.  I thought I would summarize some thoughts from some of the links available there.

From JP Morgan’s “Asset Allocation Views” (highlighting and underlining are mine)

“Selecting a theme that encapsulates the year so far is an unenviable task. The financial media may delight at the tempo of news flow—the sharpest U.S. dollar rise in 50 years, large-scale quantitative easing in Europe, the (now traditional) first-quarter slump in U.S. data and a sharp slide followed by a rebound in oil. But for investors, the sheer multitude of market-moving events might explain the prevailing tone of caution.

For all the frenetic pace of market developments in early 2015, global asset market returns proved remarkably resilient. Developed world equities delivered 4.2% in the year through May 6, and G4 10-year bond (U.S., UK, Japan and Germany) returns were flat. Meanwhile, the VIX—the Market Volatility Index and the often quoted “fear gauge”—actually declined from 19 to 15. So why the palpable sense of foreboding?

In our view, three factors account for the pervasive market skittishness: extrapolation of the soft patch in the U.S., fear over the impact of higher U.S. rates and lingering skepticism over the global recovery. We also believe that many find the length of the current business cycle disorienting.

Notwithstanding soft first-quarter U.S. data, most macro data points show the U.S. economy in mid-cycle. It would be extraordinary for the U.S. to move from a prolonged early-cycle phase directly to late-cycle before the Federal Reserve (Fed) raises rates, but this fear of “policy error” haunts investors. The impacts of the recent European crisis, and the long-term experience of Japan’s underperformance, are cut deep in investors’ memories.

There remains a divergence in growth and policy around the world, and while we expect this to persist through 2015, we also have faith that the world economy is improving. Rising wages and a slower pace of U.S. dollar appreciation should limit the fallout from the Fed’s expected tightening in the third quarter. Meanwhile, European and Japanese policy stimulus is coming in tandem with better data trends.

We expect both data and policy to reinforce the notion that the U.S. economy is in mid-cycle. Paradoxically, the very fear that the economy will lurch to late-cycle or slide into recession will probably restrain the exuberance that is common at the peak of a cycle.

This presents a supportive backdrop for equities. U.S. stocks lagged in early 2015, but cuts to earnings expectations leave a low hurdle for positive surprise. Meanwhile, higher beta markets—Europe and Japan—continue to deliver on earnings as currency weakness boosts output.

The downside risks of overzealous policy tightening or a currency crisis in emerging markets remain; on the upside, a more synchronized global recovery would give a powerful boost to risky assets and send bond yields higher. On balance though, we believe that the themes of divergent global policy, a gradual recovery in Europe and a rebound in U.S. economic strength will dominate the middle part of the year. The growth scare from the first quarter should abate, and while we anticipate some volatility around the first Fed hike, we see a U.S. economy in mid-cycle and a supportive backdrop for risk taking.”


From PIMCO’s “Secular Outlook May 2015 – The New Neutral Revisited”

“Six trends driving global markets

  • Converging to New Normal potential growth rates in developed and emerging economies.
  • Evolving to a re-regulated, better capitalized global banking system.
  • Moving from energy scarcity to energy abundance unlocked by the shale revolution.
  • Accelerating from deflation and toward targeted 2% inflation in the major economies.
  • Shifting (a nascent trend) from a global savings glut supported by lower commodity prices and toward narrowing global imbalances amid stronger global demand, which will depend to some extent on whether China can succeed in making the middle income transition
  • Implementing (another nascent trend) better economic policy in key emerging economies (China, India) as well as key developed economies (eurozone, Japan) with at least the possibility of future breakthroughs in U.S. economic policy (immigration, oil exports, trade promotion authority).

Six key tail risks to the secular trends

  • With trend growth rates and inflation modest, policy rates low, public balance sheets bloated and public debt high, few countries would have room to maneuver to deploy countercyclical policy were the global economy to go into recession within the next five years.
  • The re-regulated, better capitalized global banking system allocates little of its balance sheet to making markets, resulting in greater likelihood of flash crashes, air pockets and trading volatility.
  • The trend away from energy scarcity and toward energy abundance creates big losers as well as winners and is only a net positive for global demand if the winners’ boost in consumption offsets the losers’ cut in consumption and capital spending.
  • Geopolitical conflicts have thus far been taken in stride by markets, but “disaster risk” is to some extent priced into financial assets today and is a source of volatility and downside risk to equity prices and credit spreads   and upside potential to Treasury and Bund prices.
  • The distribution of global inflation outcomes has a right tail as well as a left tail; over our five-year horizon, a breakout of inflation to the upside of central bank inflation targets is not as unlikely as many seem to assume.
  • A trend is called nascent for a reason – there is a risk it does not develop – and there is risk to our optimistic baseline that foresees better economic policy in key emerging and developed economies and the possibility of future breakthroughs in U.S. economic policy over our secular horizon. There remains a tail risk of political polarization in the eurozone and/or a British exit from the European Union. In China, the planned reforms are ambitious, but success is not assured, and capital account liberalization in particular will be challenging to accomplish in the time frame announced. “

From Oppenheimer’s “You Can’t Have One Without the Other

“In this context, we believe global equities would still outperform global bonds. The key point to remember is that on a global basis, top equity performers will likely rotate on a virtually semi-annual basis. U.S. equities were top performers until they gave way to Europe in the past six months, but we’ll probably go back to seeing U.S. equities outperform their European counterparts once again. However, since these short-term turns are so difficult to predict, a diversified global equity portfolio has been and remains our mantra for the time being.”


Finally, I also was interested in this piece by American Funds that talks about the incredible advances of “disruptive technology” and the investment opportunities related with them.  The piece looks at the turnover of companies represented in the S&P 500.  Companies that were represented in the index in 1958 had an average length of representation in the index for 61 years.  Companies currently will average about 18 years.  At the current pace, 75% of the companies represented will be replaced by 2027.  Rapid changes in cloud technology, mobile payment systems, biotech, and music technology are creating major shifts in our everyday lives.  I think it’s valuable to remember as we often hear about the many global, political, and economic concerns that there are a lot of people putting their heads down and focusing on creating business value.