2016 Third Quarter Report: The Bull Continues

bull100 days after the Brexit scare, three quarters of a year after the most recent Fed rate hike, the markets once again confounded the instincts of nervous investors and went up instead of down.  Last week, Fed Chairperson Janet Yellen told the world that the U.S. economy is healthy enough to weather a rise in interest rates, but the Fed governors met in September and declined to serve up the first rate hike since last December 15.  That was reassuring news to the Wall Street traders, and investors generally, helping to provide yet another quarter of positive gains in U.S. stocks.

The Wilshire 5000 Total Market Index–the broadest measure of U.S. equities—gained 4.53% for the third quarter, and is now up 8.39% for the first three quarters of the year.  The comparable Russell 3000 index was up 4.40% for the quarter and is sitting on 8.18% gains so far this year.

Larger companies posted the lowest gains.  The Wilshire U.S. Large Cap index was up 3.92% in the third quarter of 2016, putting it at a positive 8.01% since the beginning of January.  The Russell 1000 large-cap index provided a 4.03% return over the past quarter, with a gain of 7.92% so far this year, while the widely-quoted S&P 500 index of large company stocks posted a gain of 3.31% in the third quarter, and is up 6.08% for the year so far.

Meanwhile, the Wilshire U.S. Mid-Cap index was up 4.35% for the quarter, and is sitting on a positive gain of 11.31% for the year.  The comparable Russell Midcap Index gained 4.52% for the quarter, and is up 10.26% for the year.

Small company stocks, as measured by the Wilshire U.S. Small-Cap index, gave investors a 7.67% return during the third quarter, up 13.03% so far this year.  The comparable Russell 2000 Small-Cap Index gained 9.05%, posting an 11.46% gain so far this year, while the technology-heavy Nasdaq Composite Index gained 9.67% for the quarter and is up 6.06% heading into the final quarter of 2016.

Looking abroad, the U.S. remains a haven of stability in a very messy global investment scene.  The broad-based EAFE index of companies in developed foreign economies gained 5.80% in dollar terms in the third quarter of the year, but is still down 0.85% for the first three-quarters of the year.  In aggregate, European stocks have lost 2.67% so far in 2016.  Far Eastern stocks are up just 1.73% for the year.  In contrast, a basket of emerging markets stocks domiciled less developed countries, as represented by the EAFE EM index, gained 8.32% for the quarter, and are sitting on gains of 13.77% for the year so far.

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, were down 1.21% for the third quarter, but still enjoy a gain of 9.75% for the year.  Commodities, as measured by the S&P GSCI index, lost 4.15% of their value in the third quarter, but are sitting on gains of 5.30% for the year so far.

On the bond side, the interest rate story is essentially unchanged: rates are still low, once again confounding all the experts who have been expecting significant rate rises for more than half a decade now.  10-year U.S. government bonds are currently yielding 1.59%.  Three-month notes were yielding 0.27% at the end of the quarter, while 12-month bonds were paying just 0.58%.  Go out to 30 years, and you can get a 2.32% annual coupon yield.

What’s keeping stock prices high while sentiment appears to be—let’s call it “restrained?”  Nobody knows the answer, but a deeper look at the U.S. economy suggests that the economic picture isn’t nearly as gloomy as it is sometimes reported in the press.  Economic growth for the second quarter has been revised upwards from 1.1% to 1.4%, due to higher corporate spending in general and especially as a result of increasing corporate investments in research and development.  America’s trade deficit shrank in August.  Consumer spending—which makes up more than two-thirds of U.S. economic activity, rose a robust 4.3% for the quarter, perhaps partly due to higher take-home wages this year.

Meanwhile, if someone had told you five years ago that today’s unemployment rate would be 4.9%, you would have thought they were highly optimistic.  But after the economy gained 151,000 more jobs in August, unemployment remained below 5% for the third consecutive month, and the trend is downward.  At the same time, average hourly earnings for American workers have risen 2.4% so far this year.

Based on their reading of the Treasury yield curve, economists at the Federal Reserve Bank of Cleveland have pegged the chances of a recession this time next year at a low 11.25%.  They predict GDP growth of 1.5% for this election year—which, while below targets, is comfortably ahead of the negative numbers that would signal an economic downturn.  (In general, a steep yield curve has been a predictor of strong economic growth, while an inverted one, where short-term rates are higher than longer-term yields, are associated with a looming recession.)

On top of everything else, as you can see from the accompanying chart, corporate profits have been on a long-term upswing, even if the rise has been choppy since 2008.  Will this long-term trend continue?  Who knows?

The U.S. returns have been so good for so long that many investors are wondering: why are we bothering with foreign stocks?  A recent Forbes column suggested the answer: historically, since 1970, foreign stocks have outperformed domestic stocks almost exactly 50% of the time, meaning the long trend we’ve become accustomed to could reverse itself at any time.

Nobody would dispute that the economic statistics are weak tea leaves for trying to predict the market’s next move, and it is certainly possible that the U.S. and global economy are weaker than they appear.  But the slow, steady growth we’ve experienced since 2008 is showing no visible signs of ending, and it’s hard to find the usual euphoria and reckless investing that normally accompanies a market top and subsequent collapse of share prices.  At the current pace, we might look back on 2016 as another pretty good year to be invested, which is really all we ask for.


Wilshire index data.  http://www.wilshire.com/Indexes/calculator/

Russell index data: http://indexcalculator.russell.com/

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

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Will Your Morning Cup of Coffee Make You Healthier?

coffeeIf you drink coffee habitually, you’ll like this. A new study monitored the coffee intake of 208,500 men and women over the course of 30 years, and found that people who drink coffee in moderation (fewer than five cups a day) received a number of significant health benefits.  Among them: lower risk of dying from heart diseases, diabetes, certain brain conditions—and, oddly enough, suicide.

Of course, you’ve already read that coffee compounds are rich in antioxidants and inflammation-fighting agents.  Researchers haven’t found the precise link between the diminished health risks and coffee consumption, but speculate that these beneficial compounds could be involved—and outweigh the detriments associated with caffeine consumption.

Source: http://diply.com/sciencep/article/coffee-helps-live-longer

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Whither Brexit?

am-brit-flagMore than three months after British voters elected to extricate their economy from the European Union, Brexit still hasn’t actually happened.  What’s going on?

Apparently nothing more than a careful process designed to minimize damage on both sides of the English Channel.  British Prime Minister Theresa May recently announced a target of late first quarter 2017 as the time she and Parliament will finally pull the trigger and invoke Article 50 of the EU’s Lisbon Treaty.

When that happens, it will, by contract, start two years of negotiations on exactly what the economic relationship between Britain and mainland Europe will become.  At the same time, however, May says she plans to introduce “Great Repeal” legislation next year that will convert all existing EU laws into U.K. legislation.  Parliament will also have to repeal the European Communities Act of 1972.

But will there actually BE a Brexit?  A group of over 1,000 British barristers have signed a letter pointing out that the Brexit referendum was nonbinding, and that the prime minister cannot make such a significant decision without consulting Parliament.  It’s possible that until Parliament affirms the extrication from the European Union, it won’t legally take place.  London’s High Court is expected to issue a ruling on Parliament’s role in Brexit on October 13, but an appeal is expected no matter what the ruling—sending the case to the U.K. Supreme Court to be heard in mid-December.

It may be helpful to remember that May herself advocated remaining in the European Union prior to assuming her current leadership position.  There is speculation that her uncompromising timeline on Brexit is simply a way to reassure voters that she has heard their message.  Then she can work for a so-called “soft Brexit,” where the country will control its borders via liberal work quotas, and there will be little changed in terms of trade and finance.

Meanwhile, despite the dire predictions, there has been no British recession as a result of the unexpected vote, and little has changed in regard to London’s status as Europe’s leading financial center.







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Bees an endangered species?

beesYou probably know that the bee population in the U.S. has been collapsing for the past several years, due to factors that are only now being partially understood.  Scientists call the phenomenon “colony collapse disorder,” but the term “beemageddon” has become popular among laypersons.

Suspects for the population decline have included pesticides, disease-bearing parasites and poor nutrition.  The most recent study by the University of Maryland and the U.S. Department of Agriculture has pinned the decline on a witch’s brew of common pesticides and fungicides used by farmers, which contaminate the pollen that bees collect to feed their hives.  The scientists identified 21 different agricultural chemicals in one sample alone.  The chemicals, acting together, reduce bees’ ability to resist infection by a parasite that had been previously identified in colony collapse disorder.”

Perhaps the most alarming news is that one plentiful member of the bee family has become the first in bee history to be put on the endangered species list.

The protection has been extended to yellow-faced bees in Hawaii, which were once the most common insect on the islands.  They are now rarely seen, in part due to the destruction of its traditional habitats, in part due to competition from an invasive bee from India competing for the same flower nectar, and from invasive ant species that lunch on their larvae.

The endangered species listing will help protect the yellow-faced bees’ critical habitats, while mainland researchers still try to figure out what to do in the rest of the country to halt the alarming population decline.





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The Anti-Trump Fund to Watch

electionYou can go to Las Vegas and bet on the U.S. election, or make a side bet with your friends.  Or you can buy an ETF.

Say what?  Professional investors have noticed that the iShares MSCI Mexico Capped ETF (ticker: EWW), an ETF that focuses its investments in Mexican stocks, is increasingly being driven up or down based on the polls that display the possible election odds of wall-building, NAFTA-renegotiating candidate Donald Trump.  As the Trump campaign gained steam in September, short-interest in the ETF rose 59%.  The fund has since recovered as Democratic nominee Hillary Clinton’s popularity rebounded after the recent Presidential debate.

Mexico’s economy was hard-hit by the decline in oil prices, and sluggish economic growth in the U.S. has had an impact on exports.  But the prospects of a Trump presidency, and a possible slowdown in trade with (and outsourcing from) the U.S. market, make investors skittish about investing in the Mexican economy’s near future.  Four-fifths of Mexico’s exports go to the U.S., and factories along the Mexican border with the U.S. have been replacing China as the outsource of choice for American manufacturers looking for less expensive labor. The head of Mexico’s central bank, Agustin Carstens, said that a Trump presidency would hit his country like a hurricane.

Rather than engaging in short-selling or speculative investing—a loser’s game, long-term—you might simply watch the ETF’s ups or downs heading into November.  Its fluctuations might turn out to be more accurate than the polls.  But it might also be helpful to remember that right up to the British Brexit vote, people were relying on the rising value of the British currency to tell them them that the smart money “knew” that the English people would vote to stay in the European Union.  And then they didn’t.

Source: http://www.reuters.com/article/us-usa-election-funds-idUSKCN1202IV


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Taxes Up (but not so much as you might think…)

ca-2016-10-2-tax-revenuesIf you think taxes are higher than their historical rates, well, it depends on how far back in history you’re comparing them to.  Take a look at the accompanying chart, which shows tax revenue as a percent of total national income for four countries—France, Sweden, the United Kingdom and the U.S.—since 1868.  The chart ends in 2008, and is taken from research by tax policy analyst Thomas Piketty.

People who think taxes are too high will note that today’s total tax haul is much higher today than it had been during the period from 1868 through 1940, and the spike due to World War II’s considerable expenses was never compensated for by a fall back to previous levels.

However, notice that the total for America has largely leveled off in the past 30 years, and most especially notice that the U.S. share of total income, at 27.5%, is considerably lower than the other countries.  Both France and Sweden are flirting with 50% levels, while the U.K. is just above 35%.  In the case of the U.S. and Britain, total tax levels are largely unchanged since around 1960—which is not something you hear in Presidential or Congressional debates about our tax rates.

You also aren’t hearing much about the growing national debt these days, in part because the rate of growth has slowed dramatically and is now at or below historic averages.  The accompanying chart shows an encouraging trend of federal deficit as a percentage of U.S. GDP; the black line represents a zero budget deficit, which was breached briefly during the Bill Clinton presidency.  The dip starting in 2008 represents the historic government bailout which was designed to address the Great Recession and global banking crisis that began in 2008.


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Good News About HIV

hivYou don’t hear much about the HIV epidemic any more, despite the fact that an estimated 1.2 million Americans are living with the disease, and an estimated 44,000 new cases are reported in this country every year.  The Center for Disease Control says that 36.7 million people around the world have the disease, and 1.1 million died from AIDS-related causes last year.

Until recently, there was no cure for HIV.  But that may have changed, thanks to the work of researchers at the universities of Oxford, Cambridge, Imperial College London, University College London and King’s College London.  The researchers are testing a new therapy which targets the disease in its dormant state, and to everyone’s surprise, one of the 50 people in the trial appears to be completely cured.  The virus is completely undetectable in his bloodstream.

Current treatments have reduced the death rate of HIV victims by targeting the disease whenever it starts reproducing from the DNA of immune cells in the body.  But these anti-retroviral therapies (ARTs) can’t spot infected cells where the virus is dormant.  The new therapy uses a vaccine to help the body recognize which cells are HIV-infected, and then a drug called Verinostat activates those dormant cells so they can be spotted by the immune system and eliminated.

The trial is ongoing, but it provides hope for millions of people who are living under one of the most intractable diseases on the planet.





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