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Jobs, Banks, and Rates

Brouwer & JanachowskiJuly 8, 2016

We have seen a remarkable snap back in the market since the Brexit vote. U.S. stocks are within a whisper of their all-time high. Ten-year Treasuries hit 1.37%, a total return of nearly 17% for the year. And the 30-Year Treasury yield hit 2.14%, the lowest ever (they've only been around, on and off, since 1977).  What’s going on?

  1. European Mess: There’s been little good news out of Europe. The lack of any direction and leaderships means that growth and confidence have suffered. Here's one chart that tells it all.

Blog 7816Euro Banks_DBK-ETR

It shows three bellwether banks in Germany, Italy and the UK. All three are down by more than 50% this year. Why? Bad loans, low net interest margins and insufficient capital. Oh, and bad management. And if the banks are in that sort of shape (there are exceptions), they’re in no position to lend. However hard the ECB leans on them. So investors came out of Europe and straight into the U.S. Most European and Asian markets are down for the year with some, for example, Germany, Japan and China, down 10% to 14%.

  1. U.S. Employment: there are too many other variables at stake for this to be a major market mover, but the new jobs number came in at 287,000, an abrupt improvement from the 11,000 in May. We would note that the margin of error on NFPs is +/- 100,000, so this could all be revised away. But meantime we have a nice pairing of better employment and no imminent rate increase. Treasuries barely moved.
  1. U.S. stocks: Here's the chart.

Blog 7816S&P 500 Annual 2_SP50-USA

The reason it gets interesting is, first, that the upper bound of 2150 may break soon. We don't invest through charts. But others do. Second, we’re about to hit a reporting season that will show good year over year comparison. If earnings rise as we expect, the market will steadily cheapen. The forward price-earnings ratio is now around 15. It was 18 a year ago. Similarly stock yields should rise to around 2.3%.  They were 2% a year ago. So we like U.S. stocks.

Bottom Line: As we’ve said before (and will again) summer can be a weird time for markets. People are away. Europe heads to the beach for six weeks. So expect volatility. But we like domestic stocks. And we recently increased our exposure. International stocks are in a holding pattern.

 

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--Christian Thwaites, Brouwer & Janachowski, LLC

 

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