PMC Weekly Review - July 29, 2016

A Macro View – Markets Thriving on Uncertainty

As we close out July this week, equity markets appear to be stuck in a holding pattern, following several weeks of gains, capping off a great July that has been a slow grind higher each week. These gains have come roughly one month after the Brexit shock at the end of June, with markets reaching all-time highs, and the S&P 500 gaining 9%, from the June 27 low. As equities have continued to slowly inch higher, investors are right to ask: Where do we go from here?

The quote, “it's difficult to make predictions, especially about the future,” holds true, especially when dealing with stock market predictions. Although market strategists may try their best, analyzing past events and the current environment often provides a better view of where markets are headed. The last two weeks had much of the country engrossed in the extremely polarizing Democratic and Republican National Conventions; other people were tied to their iPhones in search of remaining Pokémon. Examining the current environment may indicate that mixed earnings, unstable economic data, and accommodative central banks have led to a market thriving on uncertainty—a factor that typically leads to its failure.

This week we had a jam-packed earnings calendar. Headlines featured strong quarterly results from Facebook, Alphabet (Google), and Amazon, three Technology mega-caps whose earnings each beat expectations followed by their shares moving higher. On the other end of the spectrum, McDonald’s missed on earnings expectations, Coke reported lower than expected revenue, and Ford’s shares declined by more than 8% after an earnings miss and lower guidance. Predicting the right earnings winners for the second quarter has proven challenging.

If investors weren’t sufficiently confused by earnings, these past few months have also provided a plethora of disparate economic data. The June nonfarm payrolls came in much higher than expected, with a gain of 287,000 jobs. However, this positive figure followed a surprisingly weak May report of only 11,000 new nonfarm jobs. Preliminary U.S. GDP was reported at 1.2% for the second quarter, well below the 2.6% that economists expected, and marking three straight quarters under 2% annual growth. One benefit of uncertain economic data has been the global central banks’ accommodative stance, which, in turn, has helped propel asset prices higher.

The Bank of Japan, European Central Bank, and Bank of England have been, and are expected to remain, accommodative with their monetary policy. The Federal Reserve has balked at raising rates five times this year. The lack of sustained data across all sectors of the U.S. economy, coupled with global risks, has kept interest rates unchanged this year. And here’s another prediction to add to the mix: Should the global risks dissipate and economic data improve, the Fed may raise rates at one of the three remaining FOMC meetings this year.

Attempting to predict earnings, economic data, or central bank policy (even in a telling market), is a difficult endeavor. The slow grind higher may be where this market is headed, or perhaps we may be stuck in a holding pattern until we get more stable readings. Although markets are supposed to be forward looking, we participants may find it difficult to do the same.

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