Month: June 2016

SPDR S&P 500 (SPY)

iShares 20+ Year Treasury (TLT)

iShares iBoxx $ Investment Grade Bonds (LQD)

iShares Core High Dividend (HDV)

Vanguard Dividend Appreciation (VIG)

iShares MSCI Edge Minimum Volatility USA (USMV)

Dividend-paying funds are once again outperforming as Brexit repositioning wanes. Low-volatility shares have also outperformed through the last week’s brief turmoil, sending USMV to a new 52-week high.

Dividend outperformance will continue to follow the bond market. While stocks recovered on Tuesday and Wednesday, the bond rally is only now starting to show signs of reversing. Bond prices may continue to trade higher as central bank asset purchases are priced in, though it is more likely they will begin to fall as stock prices push back towards their pre-Brexit levels.

Britain has largely recovered from Brexit losses, despite sizable losses in European banks. Shares now trade higher than they did two weeks ago. However, they are below the “Remain rally” that pushed shares up before the vote, but that bullish speculation is what helped caused the steep drop in the first place. If you told people two weeks ago that Britain would vote to Leave and shares would be trading higher a few days later, they wouldn’t have believed you.

Fidelity Select Financials (FIDSX)

Fidelity Select Insurance (FSCPX)

Fidelity Select Banking (FSRBX)

Fidelity Select Consumer Finance (FSVLX)

iShares MSCI Europe Financials (EUFN)

Unlike European banks, domestic financial funds weathered recent volatility well, trading in tandem with the market. There was predictable Brexit spillover into the U.S., but European banks are clearly the selling targets. The tension between indebted southern European states and creditor states in the north is a permanent fixture due to the currency union.

Fidelity Floating Rate High Income (FFRHX)

DoubleLine Core Fixed Income (DLFNX)

Thompson Bond (THOPX)

Fidelity Corporate Bond (FCBFX)

Fidelity High Income (SPHIX)

THOPX, FCBFX and DLFNX all rallied last week. High-yield credit dipped, but recovered nearly all of its losses as of Wednesday.

Indexes & Sectors

The trend in value and growth performance was steady, despite increased volatility. We saw a similar result with the index funds. The Nasdaq has been a little weaker due to some lagging technology stocks, but the performance of the other indexes all converged in the wake of Brexit, a sign of mostly indiscriminate trading.

SPDR Energy (XLE)

First Trust ISE-Revere Natural Gas (FCG)

Oil is consolidating its rally across $50 a barrel, still pulling back into the high $40 range, while natural gas continues its rally towards $3 per MMBtu. La Nina is expected to arrive by autumn at the latest, bringing colder-than-normal water temperatures to the Pacific Ocean.

Markets will look for stability this week following Britain’s stunning decision to leave the European Union. Volatility is likely to continue as investors and fund managers reposition portfolios in light of the referendum, though trading had already moderated considerably by Monday afternoon. Although European markets traded lower on Monday, the FTSE 100 in the United Kingdom was well ahead of Friday’s lows. The European banking sector, however, continues to face selling pressure that some speculate will lead to policy intervention. Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney both withdrew from an ECB Forum on Central Banking this week, a three-day event in Portugal that ends on Wednesday.

The third and final estimate of first quarter GDP will be released on Tuesday. Economists forecast the growth rate was 1.1 percent, up from the revised 0.8 percent figure in the prior report. The Case-Schiller home price index for April is also due out on Tuesday.

In addition to the weekly crude oil inventory data, personal income, consumer spending and core inflation for May, as calculated by the Bureau of Economic Analysis, will be available on Wednesday. Thursday’s reports include the weekly unemployment claims data in the U.S. as well as Japanese industrial production, British GDP growth and Eurozone consumer inflation.

Manufacturing PMI’s for the U.S., China, the United Kingdom and the Eurozone will all be closely watched. In the U.S., analysts expect both the Markit PMI and ISM Survey to come in around 51.5 to indicate manufacturing sector expansion. May construction spending, a key number for second quarter GDP, will also be released on Friday. Motor vehicle sales were strong in May, on pace for 17.4 million sales in 2016. Economists expect June sales of 17.3 million vehicles.

General Mills, Monsanto, Nike, ConAgra Foods, Darden Restaurants and Micron Technology will all report earnings this week. Before the bell Wednesday, analysts expect General Mills (GIS) will report earnings per share of $0.60 on revenues of $3.86 billion. The stock rallied after strong earnings last quarter, but adjusted gross margins declined due to weak cereal sales and the company’s introduction of organic, natural and gluten-free products. Monsanto (MON) is expected to deliver EPS of $2.42 and revenues of $4.5 billion. The consensus estimate calls for EPS of $0.48 from Nike (NKE) on revenues of $8.27 billion. Increased competition and lower sales of high-end basketball shoes with be a focus for investors.

ConAgra Foods (CAG) and Darden Restaurants (DRI) are scheduled to report before the bell Thursday. Omaha-based CAG is forecast to report EPS of $0.52 and revenues of $2.89 billion. Investors will want to see if DRI profited from the growth in restaurant spending in the prior quarter.  Shares of DRI have outperformed the S&P 500 Index since late April. Analysts expect EPS of $1.09 on $1.82 billion in revenue. DRI is the parent of restaurant chains Olive Garden and Longhorn Steakhouse, among others. Undermined by weak prices for DRAM and NAND technology, memory-chip manufacturer Micron Technology (MU) is expected to deliver a quarterly loss of 9 cents per share and revenue of $2.96 billion when it reports on Thursday.

United Kingdom voters caught speculators off guard with Thursday’s vote to leave the European Union. Odds were overwhelmingly in favor of the Remain side throughout the week, which led to a great deal of re-pricing.  While markets predictably sold off on Friday, trading was well-controlled and the most severe declines occurred outside of the United States and United Kingdom.  The S&P 500 Index closed the week with a modest loss of 1.92 percent.

There were some significant moves in asset prices, but most of these were remarkable only because of the run up in prices ahead of the vote. iShares MSCI United Kingdom (EWU), for example traded higher today than a week ago:

Global markets trade in tandem, but fundamentally the U.S. is fairly immune to the effects of the British vote.

The British Pound saw a large overnight drop, at one point falling well over 10 percent versus the U.S. dollar, mostly a reversal of bullish bets on the pound in the prior week. The pound is trading a penny or two below where it traded on February 29.

The best buying opportunities are in markets not directly affected by the vote, such as the U.S. We may see some volatility stretch into Monday as China adjusts the yuan to these moves, but prices should be higher next week.

Federal Reserve Chair Janet Yellen did not give clear guidance on in her testimony before Congress, but did caution that slow economic growth might continue for the near future. The weekly mortgage application index rose 3 percent. Existing homes sales hit a 9-year high as buyers took advantage of lower rates. The Home Price Index rose another 0.2 percent last month. Overall, home prices are up almost 6 percent compared to a year ago. While oil inventories were down slightly on the week, there was a build in gasoline supplies, which is good news for summer driving. The number of Americans filing for first-time unemployment benefits fell to a near 43-year low. While analysts were expecting 270,000 new filings, the Labor Department reported 259,000 new claims. The flash PMI showed an improvement in the manufacturing sector, with new orders and hiring rising.

Adobe Systems, FedEx, Bed, Bath & Beyond and BlackBerry reported earnings this week. San Jose-based software company Adobe Systems (ADBE) beat analysts’ expectations with earnings per share of $0.71 on revenues of $1.4 billion. FedEx (FDX) posted a quarterly loss.  Although the company delivered EPS that beat the $3.28 estimate by 2 cents, cost adjustments associated with the firm’s pension and expenses related to the acquisition of Dutch company TNT resulted in a loss of $0.26 per share and unclear forward guidance relative to its pension costs and its TNT acquisition. Shares were sold as a result.

Bed, Bath & Beyond (BBBY) reported disappointing earnings Wednesday, but shares finished 1.5 percent higher following positive forward guidance. On Thursday, BlackBerry (BBRY) reported earnings per share of $0.00, which beat analysts’ expectations of a $0.08 loss. Its $424 million revenues missed consensus estimate. BBRY affirmed their full-year guidance and shares rallied on the news.

Fidelity Select Financials (FIDSX)

SPDR S&P Regional Banking (KRE)

Fidelity Select Insurance (FSCPX)

Fidelity Select Banking (FSRBX)

Fidelity Select Consumer Finance (FSVLX)

Financials rallied with global markets on hopes that Britain will vote to remain in the European Union. European bank stocks, tracked by iShares MSCI Europe Financials (EUFN) have performed very well in the run-up to the Brexit vote, despite the risk of major volatility.

Fidelity Select Biotechnology (FBIOX)

iShares US Pharmaceuticals (IHE)

Biotech and pharma rallied on Wednesday following a non-ruling by the Medicare Independent Payment Advisory Board, reassuring investors that no immediate cuts will impact the sector.

Pharma Chart

SPDR S&P Dividend (SDY)

Vanguard High Dividend (VYM)

SPDR Utilities (XLU)

Dividend funds have outperformed the broader market in 2016 and continue to withstand market volatility admirably.  Funds such as SDY that are overweight utilities have fared better than those with lower exposure.

Fidelity Floating Rate High Income (FFRHX)

DoubleLine Core Fixed Income (DLFNX)

Thompson Bond (THOPX)

The Fed’s decision last week affected the stratification of bond fund returns. THOPX outperformed, followed by DLFNX and then FFRHX. THOPX benefited from the rally in risk assets and the Fed’s dovish outlook on interest rates. DLFNX, which was betting on short-term rates rising in 2016, was slightly hurt by the Fed’s decision, as was FFRHX.

Value vs Growth

SPDR Energy (XLE)

Value shares benefited from last week’s rebound in energy shares, aided by a bounce in oil prices. A large inventory decline reported on Tuesday pushed oil back above $50 a barrel. Internet and technology stocks, such as Google (GOOG) and Apple (AAPL) also boosted Value shares following reports of slowing internet advertising.

The first chart below reflects the relative price performance of SPDR S&P 500 Value (SPYV) versus SPDR S&P 500 Growth (SPYG), with the second line showing the performance of SPDR Energy (XLE).

The second chart illustrates Alphabet’s (GOOG) inverse performance.

Fidelity Low Price Stock (FLPSX)

Fidelity Low Price Stock outperformed both the mid- and small-cap indexes over the past week. Top-ten holding Autozone (AZO) as well as U.S. and U.K. insurance provider Unum Group (UNM) lifted the fund.