Q2 2016 Commentary

Q2 2016 Commentary

ARQ Wealth Advisors 2Q 2016 Commentary: Climbing the Wall of Worry                       

by Richard Siegel, CFP®2Q2016image1

In relation to the stock market and the economy, one could ask themselves, “when will things just calm down and be normal?” Well, I have the answer for you. NEVER. We call this “climbing the wall of worry.” There is always something to worry about, economic issues to be concerned about, and political and geopolitical issues to fear. Counter intuitively; it is when there is complacency and lack of concern that one should take pause.

Currently, the major themes that are affecting capital markets include:

The Brexit: The UK voted to leave the European Union. After decades of participating in this continental experiment, the Brit’s have decided they want to make their own decisions and want to strive for a more robust economy. The vote caused shockwaves throughout the global capital markets initially, but quickly rebounded as this decision will take a couple of years to implement.

The Fed’s Quandary: The Fed wants to raise interest rates, but is having a hard time due to mixed economic data and possible negative ramifications from the Brexit vote.

Oil Prices: Oil prices have moderated, rising from $27/barrel in February to as high as $50/barrel during the quarter. Prices at the pump are still attractive for consumers and beneficial for energy related corporate earnings.

U.S. Dollar: During 2015, the dollar gained significantly over most major currencies making it difficult for our exporting companies to achieve profitability. So far this year, the dollar has given much of this gain back.

Bank Stress Tests: The annual test measuring if banks have ample capital & liquidity along with appropriate safeguards in place to survive several worst-case scenarios were reported to be quite positive on the whole.

Election Season: The uncertainty of the coming Presidential election is sure to impact investors’ perception of risk.

Economic Data: Although the unemployment rate has been consistently improving, the last reading was well below expectations. The housing market continues to be a bright spot for the U.S. economy. The strength of the housing sector helps to drive overall retail spending, which has been growing steadily. GDP growth is forecast to remain positive in the 1 – 2% range, far from recession territory.

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Equity Overview:

For the quarter, global equity markets continued their violent gyrations primarily driven by the surprise Brexit vote outcome. Aside from this short-term drop and quick recovery, stocks are looking for firmer ground based on economic data and corporate earnings. Earnings growth in recent quarters has lost its upward momentum due to a strong U.S. dollar and falling oil prices. These two factors which have been a headwind to growth may soon prove to be a tailwind. As we enter Q2 earnings season, positive results will be key to sustain and grow stock prices from current levels.

2Q2016image3From a sector standpoint, global investors have been flocking to perceived safe-haven sectors during the recent turmoil, including utilities and consumer staples. These sectors historically have lower valuations than the broad market, but over the last few years have been trading at premium valuations based on high demand. Sectors such as technology and health care which typically trade at higher valuations, look attractive today by comparison. Our methodology focuses on broad diversification, so we make sure to not overweight the defensive sectors which are relatively expensive compared to the more economically cyclical and sensitive sectors of the market.

 

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Fixed Income Overview:

Global fixed income securities once again proved to be a strong performing asset class during the quarter based on interest rates continuing their unprecedented fall. To reiterate our position on fixed income; it is a necessary component to a diversified portfolio for long term returns, a hedge against equity market volatility, and an income generating asset class. That said, we continue to proceed with caution in the space. With rates at such low levels, prices are elevated in many areas, so we are positioned in a moderately defensive manner to protect principal against rising rates.

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In fact, rates are so low that Bloomberg reports 33% of global sovereign debt is now yielding under 0%, meaning that investors have to pay a fee to those governments to invest in their bonds. From a strategy standpoint, we believe government debt instruments are overpriced and investors are not being adequately compensated for the interest rate risk they are taking. That said, we are overweighted in corporate and municipal bonds which are higher yielding and lower priced.

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As we transition into the second half of 2016, we anticipate more market volatility as we move closer to one of the more controversial Presidential elections in our history, more news surrounding the Brexit, and very important economic data and earnings reports. Keep in mind however, that the stock market is a forward looking mechanism and much of what we are concerned about is most likely factored in to prices. Our strategies are well diversified and well positioned to continue successfully climbing the proverbial “wall of worry.”