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August 1, 2016
What happened in July?
Global stocks, U.S. and international alike, experienced upward movement in July in a relatively tight range with low volatility. After the Brexit turmoil in late June, market news headlines were light. Fears of a slowing economy, interest rate hikes and geo-political tension all subsided, allowing corporate earnings and macroeconomic data to lead the way. The S&P 500 Index rallied +3.7% in July while international equities (ACWI ex-U.S.) advanced +5.0%. The S&P 500 Index finished the month at an all-time high.
Moving into August
We decreased exposure in our U.S. tactical strategies throughout July as valuation and technical momentum indicators weakened. We enter August approximately 80% and 97% in our U.S. and international strategies respectively. With a strong economic backdrop and positive sentiment, we expect continued growth in the near-term but remain cautious as all-time market highs have stretched stock valuations.
Indicators that Declined
Indicators that Remained Positive
P/E multiples rose to their highest levels in over a year to 20.3 with Forward P/E at 18.4, stretching values on an absolute basis. With a continued inflow to safe-haven assets such as fixed income, equities continue to hold relative attractiveness.
The S&P 500 Index is 6% above its 200-day moving average and 3% above its 50-day, indicating a short-term reversal is more likely. Volatility (VIX) also sits at yearly lows which has historically foreshadowed complacency in the marketplace.
Continued low unemployment figures (< 5%) and better than expected payroll figures keep the U.S. economy on solid footing displaying modest growth. The U.S. market has enjoyed the longest set of consecutive monthly gains in history.
The UM Consumer Sentiment Index remains positive, while PMI data strengthened, showing signs of an improving U.S. manufacturing sector. Of reported earnings thus far, over 70% beat analysts’ estimates.