U.S. equities continue to hover near their all-time highs amid a slew of second-quarter corporate earnings results that have generally been well received by the markets. So far this earnings season, revenues and profits at most S&P 500 firms have exceeded investors’ expectations. In addition, analysts have reduced their estimates for declines in corporate net income, and now expect a 4.5 percent slide for S&P 500 companies for the second quarter. Stock prices did come under some pressure late in the week due to lower-than-expected GDP growth for the second quarter, but this reaction appeared to be muted somewhat by the perception that the Fed will remain on hold for longer.
The Federal Reserve Board once again opted to keep short-term interest rates at their historically low levels during their meeting last week. Investors believe the Fed is taking a “wait and see” approach with rates as they try to gauge the impact of last month’s Brexit vote, among other factors, on the global economy. This caution seems to be warranted in light of the weak GDP data for the second quarter. However, the Fed also noted that short-term risks to the economy have diminished, and continued to emphasize a gradual pace of interest rate increases going forward.
Meanwhile, oil prices fell to nearly their lowest levels in more than three months. Government data showed that crude oil stockpiles in the U.S. unexpectedly rose, adding to an oil and gasoline supply glut that is at its highest seasonal level in at least two decades.
GAIN: Active Asset Allocation
We remain relatively bullish on equities, as our market indicators remain supportive and due to largely better-than-anticipated corporate earnings results for the second quarter. Growth-oriented market sectors such as technology and healthcare have outperformed other sectors amid renewed investor interest in biotechnology firms and software/Internet companies.
International markets were relatively flat, as investors waited to see how the results of recent European bank “stress tests” would pan out. Investors also had a muted response to the Bank of Japan’s decision to take modest steps toward boosting the Japanese economy.
In the fixed-income markets, the Fed’s decision to hold rates steady helped bond yields fall—pushing bond prices higher. Although we remain bullish on corporate bonds due to their relatively attractive yields, we are closely monitoring the High Yield bond space due to its energy exposure and the recent drop in oil prices.
PROTECT: Risk Assist
Last week continued the relatively calm environment of late. Markets were largely flat, while realized volatility remained low at the broad-market level. We calculated our volatility forecasts and updated the trigger levels across Risk Assist models, with the net result being a decline in forecasted volatility that brings the “re-entry” points closer to current values.
SPEND: Real Spend
At its meeting last week, the Fed held interest rates steady and indicated that inflation is expected to remain low in the near term—a generally positive scenario for income-oriented investors.
Stock prices have risen in recent weeks, and shares of dividend-paying companies and mid-cap stocks have also been positive. Real Spend has benefited from the rising equity markets due to Real Spend’s equity based approach (rather than a fixed-income based approach) to generate growth and income in retirement.