Commentaries
PMC Market Commentary: August 22, 2014
A Macro View – Calm Markets End with Summer?
First, let’s be clear: it’s August, and for a change relative to the past seven years, financial markets have been as calm as a late summer day. That may be in stark contrast to an eventful set of geopolitical crises. But the market effect of those events—in Ukraine, Northern Iraq, Israel, and even the treat of an Ebola contagion in West Africa—has been muted at best. As we emphasized in our latest edition of The Envestnet Edge, geopolitics rarely roil the financial markets as much as the focus on them assumes. The only exception is the price of oil, which can and often is impacted. Oil notwithstanding, it should not come as a deep surprise that markets have been relatively untroubled in the face of a troubled world.
But with summer drawing to a close, it is certainly opportune to look ahead. At the very least, volume and activity in the markets will pick up in September. Whether that will alter the upward trajectory of stocks and the downward movement of bond yields remains to be seen. Commentary from various governors of the Federal Reserve at Jackson Hole this week suggests that once quantitative easing ceases this fall, a hike in short-term interest rates will come next. That will mean an end to zero short-term rates, which should be a positive in a yield-starved world—assuming it all unfolds in a relatively orderly fashion. How that will impact longer duration rates, however, is less clear. It is difficult to see the U.S. 10-year trading below 2.5% if the short-term rate goes to, say, 1% over the next few years. But almost all informed assumptions about rates have been wrong. In positioning portfolios, we need to allow for the possibility (and perhaps even the likelihood) that rates will remain lower for longer than many have expected.
Meanwhile, warnings of a financial collapse seem increasingly disconnected from what is happening in the world at large. The S&P 500 is up more than 4% since a summer low on August 7, after markets had their worst week in two years. Of course, the fact that markets have been rising without a major correction says little about whether one is just around the corner. Yet, for the second quarter of 2014, companies reported not just stronger earnings than expected (in excess of 7.5% for the S&P 500), but stronger revenue as well. Earnings can be manipulated, but revenue speaks for itself. Healthcare saw 12% revenue gains, and technology companies more than 6.5%. Other sectors were in the range of 4%. That suggests real economic activity, and goes some way to explaining why stocks have been so strong.
Enjoy the last week of summer. If nothing else, the next month will bring greater intensity to the markets, if not greater clarity.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2014 Envestnet. All rights reserved.