• Investing & Markets

Market Recap – A Compelling Case for Modest Allocation

July 15, 2016 | Craig Birk, CFP®

Market Digest – Week Ending 7/15

Stocks continued their torrid rally after the initial selloff following the Brexit vote. The S&P 500 gained 1.5%, while the FTSE All-World ex US index doubled the effort, up 3%. Japan led, with the Nikkei Stock Average up 9% on relief from a weaker Yen and signs of stabilization in China. Investors shook off another horrific terror attack in France and looked toward stocks at the expense of bonds after yields hit record lows in several major developed markets last week.

Weekly Returns:

S&P 500: 2,162 (+1.5%)
FTSE All-World ex-US: (+3.0%)
US 10 Year Treasury Yield: 1.55% (+0.18%)
Gold: $1,337 (-2.1%)
USD/EUR: $1.103 (-0.2%)

Major Events:

•Monday – Thompson Reuters agreed to sell its intellectual property and science business to private equity firms for $3.55 billion.
•Monday – GM and Lyft extended a car rental program for the service’s drivers to California.
•Monday – Starbucks announced it will give many of its employees a 5% – 15% raise and also increased prices on many of its menu items.
•Wednesday – Germany sold ten year debt at negative yields, a first for a Eurozone member.
•Thursday – The Bank of England kept interest rates unchanged but said it expects to launch fresh stimulus in the coming months. The British Pound rose on the news.
•Thursday – China said its economy was “basically stable” and is on course to meet major targets for the year and suggested Q2 GDP will be similar to Q1 at around 6.7%.
•Thursday – 84 people were killed in Nice, France when a Tunisian man who lived there intentionally drove a truck through crowds gathered for Bastille Day.
•Thursday – Japanese messaging app operator Line surged in its IPO, valuing the company at close to $9 billion and breathing fresh life into an otherwise slow IPO market.
•Friday – Donald Trump announced Indiana Governor Mike Pence as his running mate.
•Friday – Turkey’s army says it seized power in the country even as Prime Minister said his government is still in control and there was no coup.

Our take:

A week that saw the S&P 500 hit an all-time high was marred by yet another horrific terrorist attack. France was again the victim. Once again, capital markets had little reaction, viewing these awful events as isolated incidents with little major impact on major economies.

On the surface the markets are probably right in this regard, but it isn’t so simple. Fear of migration from Africa and the Middle East is ultimately what led to the shocking Brexit vote. Markets seem to be shrugging that off as well. But a further disintegration of the European Union, especially if it comes within the Eurozone, will have consequences for the global economy that can’t be ignored. With every terrorist attack perpetrated by those of Middle-Eastern descent, tolerance will drop and some countries may find they prefer to control their own immigration policies.

If you think Treasury yields can’t go any lower, further tension in the EU could be the thing that sends them into negative territory. We’re not advocating fear of equities or loading up on Treasuries, but we believe an allocation to the right mix of bonds still plays a useful role in portfolios. We can’t think of a case where Treasuries should be the majority of anyone’s portfolio, but we suspect they are likely to become even more negatively correlated to stocks in the coming years, creating a compelling case for a modest allocation for most investors.

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