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News for the Week of July 3 – July 7, 2017
by David Abuaf, CFA
Investment Manager, RJFS
General Markets / Economic
- The dollar is down 5.6% so far this year, its worst stretch in six years, as investors turned more confident that economic recoveries around the world are gaining on or surpassing growth in the US
- Merkel and Xi pledged to boost economic cooperation between Germany and China as they met ahead of the G-20 summit
- Federal investigators believe Caterpillar failed to submit numerous required export filings in recent years
- France’s Total is set to invest $1B in an Iranian gas field
- Justine Kish is a UFC fighter who defecated in the ring. She is entertaining endorsement offers from a few butt-wipe brands, “I’m actually considering it because we could have some fun with it and maybe make the product less embarrassing and more funny.” Uh-huh, keep telling yourself that
- Be careful driving around South Bend. A 30-pound turkey SLAMMED into the windshield of a rental vehicle on US-20
Commentary for the Week of July 3 – July 7, 2017
by David Abuaf, CFA
Investment Manager, RJFS
This last week provided a lot of wobbling, as the Nasdaq Composite index threatened to break down. The tech heavy benchmark rose 0.2% last week despite closing on Thursday at its lowest level since May.
If it wasn’t clear that the world’s central banks had begun to shift away from easy-money policy, last week should leave little doubt. In the minutes from the June FOMC meeting, the members expressed their desire to begin shrinking its balance sheet before the end of the year, while the European Central Bank’s minutes contained discussion of ending its pledge to buy more bonds if the economy weakened. Rate hikes, meanwhile, are suddenly on the table in countries besides the US.
The discussion came a week after Fed chair Yellen openly questioned whether asset valuations have gotten too high for their own good, with the S&P 500 trading at 17.6x forward earnings. Keep in mind that using bond yields to dampen equity enthusiasm is a reality, even though interest rates are “theoretically” uncorrelated to equity prices. The reason they are – in reality – related is that investors crave return or yield, and if bond yields are too low, investors look for equities; conversely if bond yields are too high, not enough investment is happening in the world of equities. Evercore ISI strategist Dennis DeBusschere believes that low bond yields and central bank asset purchases have tamped down volatility in both the economy and the market, and that in turn has helped increase stock valuations.
While this doesn’t mean that the market needs to drop, it does put the onus on profit growth. Earnings should be good: S&P 500 earnings are expected to grow by 8% during the second quarter, according to Thomson Reuters. Strong, however, may not be strong enough. With rates rising and multiples under pressure due to tighter monetary policy, it might take more than your run-of-the-mill earnings beat to send stocks higher. The good news is that weaker-than-expected economic data that seemed to be a permanent part of the landscape appear to have finally started to turn upward.
All opinions presented are those of David Abuaf, and not of Raymond James or Forman Investment Services
This information is not a complete description of the securities, markets, or developments discussed and has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.
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