Our post-Brexit breakout has positioned US equity markets to once again test 52-week highs – as unexpected as that may have seemed little more than a week ago. The Dow Industrials and S&P 500 closed on Friday less than 1 percent shy of their respective 52-week highs while the Nasdaq managed a rebound that left it 7 percent below that level. Importantly, all three major market indices closed above both their 50 and 200 DMAs on Friday.
Though I was not at all surprised by the outcome of the Brexit referendum or by the subsequent rebound in prices, the caution I shared with you before that historic vote remains.
Much of my concern, though not all of it, is tied to the US Treasury interest rate landscape. Consider that the US 10-year was yielding 2.43% on July 13, 2015 – roughly a year ago. On Friday that same US debt instrument closed with a yield of 1.456%. That 97 basis point drop in yield is the equivalent of a 40 percent drop. That appetite for ever sinking yields is informing us that the smart money is operating in an investing paradigm that can best be framed by words like: caution, risk off, slowing growth prospects and a lack of confidence. WSJ update on the continued march to record lows here.
All of those terms can equally be applied to the US investing landscape but can just as easily be used in reference to the global landscape as well. With Brexit now a seemingly foregone conclusion and with clear signs of turmoil in the EU, one of the world’s largest trading blocks is in an even more compromised position than it was in little more than a week ago. Negative sovereign debt yields scatter the European landscape, consumer confidence is in a trough, an consumer demand is non-existent. Further, news out over the weekend of a rumor that the PBOC may trigger a re-capitalization of the Chinese banking system has investors on the alert. Japan’s economy is a basket case after years of stimulation and now zero interest rates. A lost decade has slumped into two lost decades with no end in sight. Speaking to that loss Mark Carney exhorts that, “opportunities should not fall by the wayside,” in the BOE’s Financial Stability Report.
The US will have a chance to play spoiler to all this dire investing framework this week – at least briefly. As the Economic Calendar indicates, we will be receiving several important pieces of data. The FOMC Minutes on Wednesday, the ADP Employment Report on Thursday as well as the Weekly Jobless Claims data, and finally June’s Employment report. The most recent employment report, coupled with revisions, are at the heart of what has triggered a renewed fear that the US economy is on the cusp of a slump. Consensus is calling for a gain of 180,000 jobs in June. If we see another disappointment like we saw in May (+38k), batten down the hatches. The Employment report topline figures, regardless of any incidental movements in participation rate, average hourly earnings or average work week are all inconsequential this time around – so is the “official” unemployment rate. In the unlikely event that we see a surprise to the upside in employment gains for June, the US economic narrative will have survived a near term storm that has conspired to drag investor enthusiasm and US debt yields to record lows. The smart money is betting on a surprise in the other direction.
Earnings season has begun in drips and drabs. It will ramp up next Monday.
As an investor, I am not expecting much but would love to be surprised. Sliding corporate revenue, extended valuations and prospects for more of the same should once again manage to hold indices range bound – a familiar call from yours truly.