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Market Recap – A Mountain of Money is Searching for a More Appealing Home

Market Digest – Week Ending 8/12

A series of mixed economic reports left US stocks flattish for the week. The dollar declined modestly, contributing to gains in international stocks and most commodities. Falling bond rates in the UK spurred increased media scrutiny on the long term impact of negative and ultra-low bond rates across the globe. The 10 Year US treasury yield dropped to 1.51%. Recent unpopular comments by Trump allowed Clinton to extend her lead in the polls.

Weekly Returns:

S&P 500: 2,184 (+0.0%)
FTSE All-World ex-US: (+2.1%)
US 10 Year Treasury Yield: 1.51% (+0.08%)
Gold: $1,336 (-0.2%)
USD/EUR: $1.116 (+0.6%)

Major Events:

•Monday – Lending Club announced its CFO will leave and reported a second quarter loss of $84 million, but shares were up 13% for the week.
•Monday – The ISM index of manufacturing activity fell to 52.6% in July, but the reading still indicates growth and was higher than many expectations in the wake of Brexit.
•Tuesday – The Bank of England said it failed to buy as many bonds as it wanted as part of its new program due to lack of sellers. 10 year gilt yields fell below 0.6% for the first time ever.
•Wednesday – Disney said it will buy 33% of BamTech, the streaming media company created by Major League Baseball, for $1 billion.
•Wednesday – Federal prosecutors were said to be pursuing a criminal case against Valeant Pharmaceuticals related to the way it charged insurers for drugs.
•Thursday – Macy’s announced it would close 15% of its stores but reported results which exceeded expectations.

Our take:

With interest rates around the world hovering around zero, the challenge for pension funds is how to generate enough return to meet obligations. The same goes for insurance companies. Retirees need to find a way to generate some income to support lifestyle. Asset managers are struggling to build portfolios with enough expected return to satisfy clients. Basically, people don’t know what to do with their money and don’t feel good about investing it. So they are hoarding it in cash or low yielding bonds.

The Bank of England found out first hand this week when it couldn’t find enough sellers to fulfill its new bond buying program despite yields on 10 Year Gilts dropping below 0.6%. It is a weird world indeed.

In some ways, this is bullish for stocks. If most people wanted to sell low yielding bonds and buy stocks, it would be concerning because most people are usually wrong. This week I had three conversations with clients or potential clients who were concerned the market was too high and zero with folks who wanted to be more aggressive and climb on a rising trend. Given that all three major US market indexes (Dow, S&P 500 and NASDAQ) hit all-time highs simultaneously this week for the first time since 1999, this is strange indeed.

We’re not especially bullish on stocks, but we think it is equally or more risky to not be invested close to long term allocation targets when there is such a void of optimism and a mountain of money sitting in zero or very low yield instruments hoping and waiting to find a more appealing home.

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