SPINNING OUR WHEELS
The one-year anniversary of the S&P 500’s all-time high took place on May 21, 2016.
Stocks have largely been spinning their wheels for the past year. TheS&P 500 has failed to return to its May 21, 2015, record high for 12 months. Stockshave actually been spinning their wheels for even longer, considering the S&P 500 isat the same level as it was on November 18, 2014. Below we compare the investment environment today to oneyear ago for some perspective.
– Market performance.
A year ago stocks were up13% over the trailing one-year period, compared with the S&P 500’s drop over the past 12 months (as of June, 2016). Oil is lower (but has stabilized), interest rates (based on the 10-year Treasury) are down, and the yield curve is flatter. The defensive utilities sector has topped the sector rankings, while a year ago the leaders were more cyclical (biotech-driven healthcare, technology, and consumer discretionary). Stocks have been adjusting to a weaker global growth environment for a year and we have not seen much evidence to date that things will get much better in the near term.
Sentiment has been subdued formuch of this bull market, but has deteriorated over the past 12 months. Fewer bulls (based on the American Association of Individual Investors [AAII] survey) and lower consumer confidence readings are consistent with market-based indicators citedabove that show slightly weaker market conditions.
– Economic growth.
A year ago the U.S. economywas coming off of a year-over-year increase in gross domestic product of 2.9% for Q1 2015, followed by 2.7% for the second quarter of2015, better than today’s level (2.0%) based on first quarter 2016 data. Other key measures of U.S. economic growth — the Institute for Supply Management (ISM) indexes — have weakened slightly. Generally, the economic growth outlook today is a bit softer than a year ago.
The U.S. economy producedsimilar job growth over the past year as it did the year prior. The economy added slightly fewer jobs in the year ending May 2016 compared to the year ending May 2015, but job gains were sufficient to push the unemployment rate down to 5.0% from 5.4%. The job market has also been strong enough to help push wage growth high enough to get the Federal Reserve’s (Fed) attention, as evidenced by the minutes from the Federal Open Market Committee (FOMC) meeting, released on May 18, 2016.
That wage growth over the past yearhas shown up in inflation measures such as the Consumer Price Index (CPI). The good news is the economy and labor markets are healthy enough to create some inflation. The bad news is fears about Fed rate hikes may continue to create market volatility.
– Fed policy.
A year ago, market expectations forthe federal funds rate at the end of 2016 were about 50 basis points higher (0.5%) than they are today, based on fed fund futures, reflecting a slightly weaker macroeconomic environment. That translates to market expectations taking about two rate hikes off the table over the last year. The Fed’s expectations have contracted more rapidly, falling 1.0% based on the Fed’s most recent “dotplots,” but still exceed market expectations for theend of the year by about two rate hikes.
President, Blue Diamond Wealth Management
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