Brooke Thackray: Market Update (July 2016)
by Brooke Thackray, Alphamountain Investments
Brexit Magic
The worldwide stock markets dropped on news that Brit- ain had voted to āLeaveā the EU. A two day correction was followed by a rapid rally in the stock market back to where it was almost just before the Brexit vote. Inves- tors quickly surmised that the process of Britain seceding from the EU might not even start for two yearsā¦.so why worry? The end result was that the stock market rallied and it was only a matter of days until the S&P 500 was back to pre-Brexit levels.
Investors generally look out six to nine months in the future in making their investment decisions. An event that could take place in over a yearās time does not fall into the decision horizon. Although the process of seceding may fall beyond the investorās decision horizon, there is the possibility that other countries may follow the exodus parade. The problem would be particularly acute if large countries that use the euro start to put their name on the exit list. If a second country were to have a referendum, investors would probably see the bigger picture and start to factor in longer term consequences, including the pos- sibility of the EU being dismantled to a certain degree.
Investors received an additional beneļ¬t from the Brexit outcome as it gave the U.S. Federal the chance to push out its schedule of interest rate increases. The U.S. Federal Reserve has talked tough on raising rates, but does any- one believe them anymore? Overall, they have been more dovish than expected. The Brexit outcome gives them the perfect excuse to delay raising rates once again. At some point, if they push out the possibility of raising rates too far, it will not really matter if a further delay is announced. Does it matter if the ļ¬rst rate rise is set for 2019 or 2020 (tongue in cheek). In fact, the futures market is placing a 10% probability that the US. Federal Reserve will add liquidity to the system in July.
On Friday July 8th, a strong nonfarm payroll report was much better than expected, and helped the S&P 500Ā® rally to ļ¬nish the day very close to its all-time closing high set in May 2015 of 2131. Despite the recent rally, over the last year and a half the S&P 500Ā® has not really gone anywhere. It crossed the 2100 threshold on Febru- ary 17th 2015 and has since zigged and zagged back and forth over the 2100 level. On June 13th, I tweeted that the S&P 500Ā® has crossed the 2100 level a total of forty-four times. Since that time, the S&P 500Ā® has continued to zig and zag and once again is above 2100.
Nothing has changed. I stand by my earlier assertions that the S&P 500Ā® is going to have a very diļ¬cult time breaking substantially above its all-time high. It is pos- sible that earnings could come in much better than expect- ed. Current expectations are for earnings to decline 4.8% (Thomson Reuters July 8th, 2016). Even if earnings came in much better than expected, the rally will probably be short lived as global growth, including the U.S. is anemic.
At this point, the stock market is very susceptible to a correction, particularly when we get past mid-July when investors will have already priced in a lot of the eļ¬ect of any positive earnings results. Despite the stock market euphoria, investors need to be cautious at this time.
