Category: SCM Market Strategist Journal

Amid the political conventions of the last weeks, the markets hit records highs but slid back to end the month. Economic news was mixed and political developments didn’t seem to have a material effect.

The Dow was up 2.8% for July after reaching a record 18,622 on July 26. The S&P was up 3.6% for the month. These highs were in contrast to the 20% plunge in oil prices which is seen by some as bearish on the stocks.

Real GDP was up a mere 12.2% for the second quarter which was better than the prior quarter’s .8% but no where near the historical 3.2%.  The short fall from expected 2+% was blamed on inventory liquidation and weak oil prices.

Retail sales were healthy but businesses are not spending. Its cheaper for them to hire workers and then firing them when things slow than investing in expensive equipment and then having it  sit idle.

Odds slightly favor the Dems retaining the White House, GOP holding onto the House and the Senate is a tossup.  Implications for the economy and markets are not favorable but recession is not expected in the nex year. The Fed may hike rates in December but a lot could happen between now and then.

US equity market recovered nicely from Brexit to finish the second quarter mostly in the black.  The Dow Jones Industrial Average was up 1.4% while the S&P was up 1.9%.  Small caps were up even more in the quarter with Russell 2000 clocking an impressive 3.4% but the tech laden Nasdaq was off 0.6%.

The ten year Treasury finished near record low yields at 1.49% while crude oil settled in at $48.33 / barrel and gold ended at $1,318/oz. The dollar bought 103 yen which has soared 14% YTD while the euro cost $1.11 which was also 2.2% higher against the dollar. The UK pound closed at $1.33 down 11% YTD.

For the first half of 2016, the Dow Jones Industrial Average was up 2.9% and the S&P 500 up 2.7%. The Russell 2000 was up 1.4% while the Nasdaq sunk 3.3%. Gold was up 24% and crude oil up even more at 31%.  Through the first half the euro climbed 2.3% and the yen was up 17%.  The UK pound was off almost 10%.

The results indicate the Brexit downdraft last week was not sustainable and the stock markets seem to be saying recession is still a few quarters out.

After the Conservatives select a new prime minister sometime in September, several financial and structural issues will have be addressed before progress is made on a smooth Brexit.

The financial decisions include phase out of UK’s EU budget contributions and what to to with joint research projects slated to end after Brexit. What are they going to do about British subjects working in EU institutions and what is the status of UK nationals living in EU and EU nationals living in the UK?

Remaining EU leaders will need to set new policy priorities regarding economic growth and security.  Negotiations can’t formally Begin until Britain invokes Article 50, official notification of withdrawal, sometime in the fall.

Markets have stabilized somewhat but it will be at least six months before we get close anything resembling normal.

Initial analysis on Britain’s exit from the EU has been all over the map and has more to do with the personal biases of the prognosticator than substance. I think we need to know who the next prime minister will be (Johnson, May or Gove?) and allow the other leaders time to hammer out positions.

Meanwhile, financial markets will have to simmer while political consensus is reached and corporate leaders can plan and execute under the new contours. The speed of departure is at issue with France demanding a quick and punitive exit while Germany wants to take time and get it right.

The US economy which remains healthy will do OK while waiting as it did through the Greek crisis.  Worries are strengthening dollar, sagging business confidence and tightening financials conditions. Households will enjoy cheaper imports, grander European vacations and lower mortgage rates.

Forecasting politics and economics is difficult even in the best of times. Best to relax and let things play out.

Seems hard to believe Britain actually voted to leave the European Union. It opens up a can of a hundred worms such as myriads of new political and financial accords to be renegotiated, new immigration policies established and opens new internal divisions among the nations of the UK.

Though ground zero was the UK and the plummeting pound, implications around the world were far reaching. Let’s start by examining what happened to global stock markets.

The first wave after the referendum results were in hit Asian markets which are mainly emerging with the exception of Australia, Japan and Hong Kong. Shanghai was down 1.3% (-19% YTD), India -2.2% (+1%), and South Korea -3.0% (-2%) respectively. Meanwhile, Japan swooned -7.9% (-21%), Australia -3.2% (-3%) and Hong Kong -2.9% (-8%).

When European markets opened the carnage continued: UK down -3.2% (-2% YTD), France -8% (-11%), Germany -6.8% (-11%) and Italy -12% (-27%). Apparently the EU markets and economic outlook suffered more than UK. Same story in the US with Dow plunging -3.4% (-0.1% YTD), S&P -3.6% (-3%), and Nasdaq -4.1% (-7%).

Looks like Fed hike is off the table until after the fall elections and the strong dollar caused by cratering currencies (except Japanese yen) will challenge US profits in the near term.  The only certainty to come from Brexit is there will be much more uncertainty.