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Weekly Vantage Point | Week of 8.1.2016

Equities Post Fifth Monthly Gain

August 1, 2016 — Despite ending Friday within two points of its 2,175.03 historical high, the S&P 500 posted a small loss last week, snapping four consecutive weekly gains. The benchmark equity index advanced 3.69% in July, its fifth monthly gain, and has rallied 8.82% from its June 27th post-Brexit low. Technology shares led the advance, surging 13.11% since the late-June low. Last week’s focus was on second quarter earnings and a disappointing reading of second quarter growth. With more than half of S&P 500 companies having reported quarterly results, overall earnings are now expected to decline 3.8% from a year earlier, according to Fact Set. A week earlier, when 126 S&P 500 firms had reported, analysts had projected a 4.4% earnings decline and before the earnings season start, analysts originally forecast a 5.3% pullback in profits.

Key among economic data last week was Friday’s lackluster preliminary growth report for the second quarter. In the first of three Commerce Department estimates, GDP expanded at a 1.2% annualized rate last quarter, well below economists’ projections for 2.5% growth. The disappointment was largely due to falling business inventories, subtracting 1.16 percentage points from growth. Within the report, the lone bright spot was a 4.2% jump in personal spending, up from a revised 1.6% pickup during the first quarter. Overall first quarter growth was revised lower to 0.8% from 1.1%.

For the week, the S&P 500 slipped 0.05%, the Dow Industrials fell 0.75%, and the NASDAQ Composite gained 1.23%. Seven of the ten major sectors ended negative, with Energy (-2.05%) and Consumer Staples (-1.44%) falling the most. Technology (+1.56%) led among gainers, boosted by street-beating earnings from internet and software companies. The US Dollar Index weakened all five days, falling nearly 2% to end at 95.530. U.S. oil futures retreated 5.86% last week, ending at a three-month low of $41.60/bbl. Hurt by rising global oil production, crude oil is now down 20.5% from its $52.31 June 8th peak, meeting the definition of entering a bear market. Treasuries climbed higher, pulling the yield on benchmark 10-year Treasury notes down 11.3 basis points to 1.454%.

What We’re Reading 
European Stocks Down After Stress Test

Early 2Q GDP Reading Misses Forecast

NY Fed Head Urges Caution About Rate Hikes

Week’s Economic Calendar
Monday, Aug 1:
PMI Manufacturing Index, ISM Mfg Index, Construction Spending;

Tuesday, Aug 2: Personal Income and Outlays;

Wednesday, Aug 3: ADP Private Employment, PMI Services Index, ISM Non-Manufacturing Index;

Thursday, Aug 4: Challenger Job Cuts, Weekly Jobless Claims, Factory Orders;

Friday, Aug 5: Non-farm Payrolls Report, International Trade, Consumer Credit.


Chart of the Week: S&P’s Sign Post: August, September May Challenge Investors’ Emotions

August and September have traditionally been the worst months for stock-price returns. Maybe it’s because of reduced capital inflows, vacations, upcoming earnings reality, and Mutual Funds’ fiscal year-end window dressing. Whatever the reasons, the results are unmistakable. August and September have recorded the worst two average price performances since 1945. According to S&P Global Market Intelligence U.S. Equity Strategist Sam Stovall, “while the S&P 500 rose in price in nearly 60% of all months, it advanced only 54% of the time in August and fell more times than it rose in September.”

In the S&P/Dow Jones’ chart above, Stovall alerts that August and September are ranked 11 and 12 in terms of monthly price increases since WWII. They recorded the 2nd and 3rd deepest single-month declines and are in the top 1/3rd of monthly volatility. Also, the S&P 500 recorded one-third of all monthly declines of 5% or more in August and September. Only October 1987’s drop of 21.8% and October 2008’s slump of 16.9% were worse.

This review is historical and actual results are not always gospel. However, S&P’s Sam Stovall’s admonition is that investors who are aware that the market traditionally stumbles during these two months are less likely to become their portfolios’ worst enemies by reacting emotionally. Rather, as Stovall observes, investors are more often than not better off buying than bailing.

This report is created by Tower Square Investment Management LLC

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The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.

The S&P GSCI Crude Oil Index is a sub-index of the S&P GSCI and provides investors with a publicly available benchmark for investment performance in the crude oil market.

The S&P Value Index is a float adjusted, market capitalization weighted index of 364 stocks drawn from the S&P 500 Index that exhibit strong value characteristics. S&P Dow Jones Indices uses three factors to measure value: the ratios of book value, earnings and the sales to price sales metric.

The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.

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