Brouwer & JanachowskiMay 27, 2016
Stocks drifted up. Bonds were flat. Oil broke through $50. Not bad as we go into the long weekend and summer’s start. This is what we think is important.
- Out of Control Fed: Janet Yellen has made only one speech this year. She gives one today after the market close. But her fellow Fed governors have no such reserve. Here’s a fuddled one from Williams at the San Francisco Fed. Basically it’s i) unemployment is at its “natural” rate at 5% (even though it was 4.5% for most of the last 20 years) ii) inflation is on the rise (even as it runs at a full 25% below the Fed’s target) iv) lower productivity growth is “not the end of the world” and iv) and to account for a lowly 0.8% growth in Q1 GDP he had his staff adjust it up (even though at least two other Federal Reserve banks disagree). You can’t make this stuff up.
There was a mess of other statements from Lockhart, Kaplan and Bullard all pointing to a rate increase in June, or perhaps July or perhaps September. Confused? We think this:
- Growth is slow. Today’s GDP came in at 0.8%. It may gain ground in Q2.
- There’s some messy political risk coming up, notably Brexit.
- The Non-Farm payrolls next week will probably be around 160,000…middle of the recent range.
- What ever and when ever the rate rise comes it’s going to be small. We’re not talking about 2%. It’s 0.25%. And all that will do will flatten the yield curve (one major reason why we like long bonds and sovereigns).
- Inflation is low but there are some pressures in there, especially from labor.
Which is why we like TIPS.
- Look at the growth numbers. Here they are from this morning’s GDP. They show contributions to growth.
The only one going up is “Residential Investment” which is good and should lead to some better consumer spending in coming months (builders build, people buy, people stock their new houses). Which is why we like domestic facing stocks.
- A trade gone wrong: Europe has disappointed this year. The markets were cheap at the beginning of the year and remain so. Part of it is Greece. A leaked IMF report said debt to GDP will soar to 300% (U.S. is about 70%) in 40 years with no increase in borrowing….the economy just continues to shrink. Some of it is a stronger Euro. And some is political. But most of these are transient and we continue to like it. In a world where value can be hard to find, it sells at around a 9% discount to U.S. stocks.
The market is up around 2.3% in the last week. We continue to like the market but admit the summer months can bounce it around a lot. China struggles with growth, the renminbi and debt. It’s one reason why Emerging Markets have not done better. But again, they remain cheap and won’t always stay that way.
Bottom Line: We counsel long-term investment and avoid over trading. We feel the money-making opportunities in the next months will be sovereigns, U.S. stocks (and perhaps value) and real estate. We’re coming out of oil-related investments given the bounce. Stay tuned.
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--Christian Thwaites, Brouwer & Janachowski, LLC
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