Week’s Best Performer: Shanghai Composite Index +4.2%
Week’s Worst Performer: CAC 40 Index (2.1%)
Broader Market Commentary:
Since Q4 of 2014, the S&P 500 has been trading in a clearly defined sideways channel with two tiers (an upper record-territory tier, and a lower consolidation/risk-off tier). The higher tier is a roughly 100-point range from 2,000 – 2,100, with the absolute record high coming during May 2015 when the benchmark index hit 2,134. The lower sideways tier is a larger range 200-point channel from roughly 1,800 to the psychologically important 2,000 threshold. Without a fundamental and structural catalyst to move the markets out of this overall 300-point range, the S&P 500 has wavered back and forth in whipsaw fashion driven in large part by Fed and global central bank policy. When policy is interpreted to be dovish and stimulative, the markets move in lockstep into the higher trading range. Conversely, when policy shifts towards the threat of tightening, as most recently experienced in late 2015, the markets swiftly sell-off and drift back towards its risk-off range. Interestingly, the markets do not move below the 1,800 floor because global economic growth and health is weakening, heightening the prospect of further accommodative policy by global central banks (i.e. more QE, negative interest rates, etc.). During the latest bull move higher in March and April, the S&P 500 was only able to hit a relative high of 2,111 (April 20), which seemingly has now become yet another failed attempt to take out record highs. This past week on Thursday June 2, the S&P moved to as high as 2,105, only to then go into an almost state of shock with Friday’s incredibly weak jobs report (38K jobs created in May vs. a consensus of ~165K, plus downward revision for April). Panic set in, albeit only momentarily as the realization swept in that a June rate hike is now off the table. The old “bad news equals good news” mantra continues to direct market forces in zombie-like fashion. With the benchmark index hovering around its ceiling level of 2,100, however, it will be interesting if the bulls have enough stimulative fuel to push markets into fresher record highs. Will a weak GDP, weakening jobs numbers, an earning recession, and tepid inflation now all of the sudden push the Fed to change course from the threat of rate hikes to joining the rest of the world into the negative interest rate abyss? If the market conversation changes from debating the timing of the next rate hike to the possibility of rate cuts (or even another round of QE), we could see this 300-point trading range of the last couple of years be disrupted. Will a fresh round of easing push markets higher, or will the realization that the economy is ill catalyze another market meltdown? Factoring in a contentious November election along with the uncertainty around a “Brexit” will certainly make for a volatile 2H16. The Lumber-Gold 13-week relative performance macro overlay continues to point to offensive positioning, however, with gold and treasuries continuing to outperform most asset classes YTD, caution must still be exercised.