U.S. equities notched another month of gains with the S&P 500 Index climbing 3.5%. The primary forces behind the rally remain better-than-expected corporate earnings, stability in the banking sector and a growing sense that, given low Treasury yields, equities appear more attractive than bonds.
In our opinion, the main risk to equities is a possible spike in bond yields. U.S. equities are at all-time highs, credit spreads have declined and cyclical sectors have been outperforming defensive areas. These are all positive signals for global growth. The United Kingdom, however, is a growing source of weakness and is likely headed into recession. Second quarter earnings have started strong. 70% of the S&P 500 companies have reported results and earnings are beating expectations.
Perhaps the most important factor in the upcoming election will be global trade. Recently global trade has clearly been impacted by the steep decline in commodity prices and volumes are declining as well. We believe the shift in sentiment away from globalization is not merely a 2016 event, but likely a generational trend.
While the last 30 years have been about free trade and facilitating the movement of goods and people around the planet, the next years are likely to see increasing impediments to globalization, vis-a-vis trade and immigration restrictions, protective tariffs, domestic content bias and the renegotiation, or negation, of existing trade agreements.
Taking a look at monetary velocity (M2 in this case), a quarterly series calculated by the St. Louis Fed which measures the number of times one dollar is spent on domestically produced goods and services in a year, we see an alarming trend. The most recent level of 1.46 is a historical low for a time period that goes back 57 years. Low monetary velocity likely points to excessive saving, consumption of foreign goods and a fundamental lack of credit. Given all of the machinations the Fed has undertaken to rehabilitate the financial sector, the lack of credit remains the most beguiling element of the post-crisis recovery.
As I tuned into the national conventions of the major political parties, I couldn’t help but to think about something my grandmother would say, “If you have nothing particularly interesting to say, don’t speak unless you can improve the silence.”
Verizon’s $4.83 billion dollar deal for Yahoo’s core Internet business is huge news, but for who? The hotly anticipated deal has been in the rumor mill for several weeks, if not months. In the end, a few boutique investment-banking firms were the big winners as the estimated $45 million dollars in fees will be split between four firms. Oh, and don’t forget the beleaguered CEO of Yahoo, Marissa Mayer. She stands to make about $55 million in severance.
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