Market Digest – Week Ending 7/24
Stocks retreated in a slow news week. Earnings were mixed, but disappointing on balance. Apple, IBM, United Technologies, 3M, American Express, Caterpillar and Qualcomm were among those that fell short of expectations. Amazon, GM and Starbucks provided balance and exceeded estimates. In M&A news, insurer Anthem agreed to buy Cigna and AT&T finalized its bid to purchase DirecTV. Gold, oil and most other commodities continued to decline amid growing investor pessimism.
S&P 500: 2,080 (-2.2%)
FTSE All-World ex-US: (-2.6%)
US 10 Year Treasury Yield: 2.26% (-0.09%)
Gold: $1,134 (-3.1%)
USD/EUR: $1.098 (+1.2%)
• Monday – Oil prices dropped below $50 for the first time since April as increasing supply offset increased demand.
• Monday – Hillary Clinton said she would propose a revamp of the capital gains tax which would extend the time required to be considered a long term gain for those in the highest tax bracket.
• Tuesday – Apple announced record earnings, up 38% from a year ago. However, revenue growth missed some expectations and shares fell 4% for the week.
• Wednesday – Qualcomm released disappointing sales numbers and said it would consider splitting its design and patent licensing businesses.
• Thursday – Turkey said it would allow the US to launch airstrikes against ISIS.
• Thursday – Ferrari, which is 90% owned by Fiat Chrysler, filed for an IPO on the NYSE which would value the company at close to $11 billion.
• Friday – Anthem agreed to buy Cigna for $48 billion. Coming on the heels of Aetna’s purchase of Humana, the deal promises to reshape the US health insurance industry.
Gold, oil, and commodities in general, had another rough week. Gold is down over 40% from its 2011 peak, while oil is down 50% in just the last year. Part of this is due to the rising dollar, and part of it is slowing demand from China. But a big reason is changing investor sentiment and the influence of hedge funds. According to Bloomberg, hedge funds are net short gold for the first time ever.
Commodities came into fashion for mainstream investors in the aftermath of the 2008 financial crisis and stock market rout. Academics noted that commodities have low correlation to stocks, which makes them a great portfolio diversification tool. More importantly, ETFs made it easy for less sophisticated investors to get exposure to gold and other commodities without having to use futures or deal with physical storage. But mainstream investors are infamous for buying high and selling low. Now that commodities prices are dropping, they are unloading commodities ETFs, further driving down prices.
All of this means that, as an asset class, commodities may become somewhat more volatile than they have been in the past – and they have already been extremely volatile. Does this mean they are not worth owning? Not in our view. For long term investors, we see no reason commodities shouldn’t continue to appreciate at about the rate of inflation with a low correlation to stocks. That means a 2% to 6% allocation will help create a more efficient portfolio for most people.
That doesn’t make current owners of gold and commodities feel any better. But if they resist the temptation to join the crowd, twenty years from now it should. A potential concern is that rapidly improving technologies are making it easier to create some commodities (like oil and gas, not gold). This will increase supply and drive down price. That’s true, but it always has been, and also applies to other sectors. We don’t see any reason commodities in general should suddenly fall behind inflation overall.