Stock Market Analysis
Last week both the Dow Transportation and Utility indexes led the way lower, and the Dow Industrials joined in with a 1.15% decline. Barron's reports twice as many stocks declined as advanced. It is not surprising that 515 issues set new lows while only 115 achieved new highs. A further sign of weakness is found in the percentage of stocks above their 50-day moving average, now only 46%. Stagnation in stocks is often found when few S&P 500 securities set either new high or lows: The ratio today is a low 1.2%. Technical indices such asmoving averages and stochastics are negative. Over the last quarter the median stock has declined 1% with mid cap issues losing even more.
The many caution signs do come with low inflation pressures, theCommodity Index shows moderate, restrained inflation, less than 1% for the week (but 4.2% year-to-date.) With Europe weakened, the dollar was a winner, rising almost 1.5% weekly and so far 5.7% year-to-date.
Of course the big news of the week is the default of Greece, which owes about 1.5 billion Euros to creditors and after long negotiations decided not to pay it. Surprising? Since the modern state was born, Greece has defaulted six times. It is said that for 30% of its existence, Greece has either been defaulting or recovering from its previous bankruptcy (The well written book, "Boomerang" illuminates and brings understanding). Almost immediately, the free flow of currency has been restricted, bringing great hardship to citizens and business firms. Greece represents such a small slice of commerce in Europe that one would not anticipate significant impact on the overall European economy. "Contagion", the risk of panicky and self-destructive behaviors on the part of itspartners is of course a hazard-however the crisis has been so prolonged that contagion risk would not appear to be large.
Where should new investments go? With European troubles it may be best to look away from the continent. Not to China which is suffering and some of their securities are in their own bear markets. Indeed, debt overhangs the world bringing to mind the famed economist, Adam Smith's observation, "When sovereign debt reaches a certain size it is never repaid." Greece certainly fits as it is not willing to meet its obligations because it does not have a Euro-printing press. However, America can meet its obligations as it has a very large dollar printing press. Our country will not run out of currency. This may be one reason to favor the US market when looking for new investments.
A number of sentiment indicators have reached Bearish extremes and some are reversing. The Investors Intelligence "Bulls minus Bears" reading set a high above 43 at the end of April. The mid-June figure was near 31 and the reading today 36. AAII's small investor index shows a very low 22.6%. Often this is bullish when fewer than one in four are optimistic. With this backdrop we have 35.1% bearish and 42% neutral (sitting on their cash?)
It is a fact that our indicators seem to improve the most just when things appear to be the worst. This may be due to depressed prices seeming to offer the most opportunity for appreciation. This condition appears to exist today. Setback in the war against ISIS, breaks in the Chinese stock market, (serious enough for them to set up a stabilization fund and restrict IPOs,) pending Greece bankruptcy, and unsettling political discourses at home, all of these are present today. Yet, the economy appears to go forward on an even, if sluggish keel and at this time our Risk Exposure Ratio is a moderate 50. Our long term risk indicators remain favorable. Looking back over the past 43 years, we do not recall a major bear market which was preceded with such a climate of fear and uncertainty. Rather, we believe this is the typical setting of an upward rally.
Leading intermediate risk indicators present a positive message. Long term indicators remain supportive of equities. The Greek "No" vote has prolonged the crises and the uncertainty. This may create a short-term pull back. In the end, investors are likely to favor the US markets. Those stocks with depressed values (Bargain stocks) have been out of favor for several months, it is about time for them to regain leadership.
F James, Ph.D.
Bond Market Analysis
Bonds had a magnificently wild ride last week with the Greek financial crises serving as the epicenter. On Monday, with the "Greek Exit" (Grexit) from the European Union taking center stage internationally our Treasury bonds rallied and yields on our 10-Year Treasury fell an impressive 16 basis points as investors sought safe havens. Since then the international stage has recovered a bit and have been taking a wait-and-see approach until this weekend's referendum by the Greek citizens. During this time our bonds lost a bit of their luster but still enjoyed positive returns for the week as a whole.
Looking at domestic influences we note many mixed messages from the employment report. Nonfarm Payrolls climbed by 223,000 representing a decent, if slightly below expectations, number. The overall trend has not been nearly strong enough. We find over the last five years our job gains have totaled 11.4 million. Unfortunately, the adult population in the United States is up 12.9 million over that same time. That is a job shortage of approximately 1.5 million.
Other problems for the economy include the type of jobs being created. We find over the last year hiring for lower wage jobs (such as temp workers) are outpacing higher wage jobs (such as information and manufacturing employees) by a 3-to-1 margin.
There are, however, some improvements that catch the eye. Jobs are becoming more plentiful to find. The Conference Board's survey samples 3,000 US households for their opinion. The latest data show only about 25.7% suggesting that getting a job is hard to get. That is down considerably from the 2009 – 2011 periods where nearly half of households were complaining about the shortage of available jobs. Additionally, we are just starting to see a pickup in hourly wages. The overall growth may be small but the trend is suggesting higher growth ahead.
Overall our bond indicators are slightly favorable but nowhere near as robust as they were last year. With major financial problems facing Greece and Puerto Rico we would recommend investors stay with high quality bonds with moderate durations.
David. W. James,