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China Challenge

Markets remain concerned that any damage done by the almost 40% drop in the Chinese equity markets since midyear will spill over into the Chinese economy, which, in turn, could slow global economic growth. During earnings season for the second quarter of 2015 , several large U.S. multinational companies sounded cautious on China’s economy in the near term, most notably firms selling into China’s real estate and construction businesses. On balance, while generally acknowledging that overall economic growth in China may have hit a speed bump
in the second quarter, many of these same firms continue to be upbeat on China in the medium and long term and continue to cite the rise of the Chinese middle class as a key driver of their sales in China in the coming years. The latest data suggest that S&P 500 companies derive less than 5% of sales directly from China….

China Challenge

Flat Start Does Not Mean Flat Finish

This year has brought a whole lotta flat. The S&P 500 dipped into negative territory for the year last week (on August 12) and is only up about 1% year to date. The bond market has been flat — the Barclays Aggregate Bond Index has returned just 0.51% so far in 2015. Even the U.S. economy was relatively flat during the first half of 2015, with just 1.5% growth in gross domestic product (GDP) on an annualized basis, well below potential. Flat, flat, and more flat. With the S&P 500 still fairly close to flat on the year (+1.6% on a price basis as of August 14), we look at how likely stocks are to produce a solid year of gains. A look back at history over recent decades is encouraging….

Flat Start Does Not Mean Flat Finish

Bond Market Perspectives: “Summer Growth Concerns”

The fixed income markets exhibited signs of a growth scare in July as inflation-adjusted, or real, yields fell over the month. The decline in real yields, along with lower inflation expectations and a flattening yield curve, all reflect the market’s downgraded assessment of future economic growth. Signs of growth picked up for the domestic economy over the second quarter of 2015 and, as a result, inflation expectations were on the rise throughout thequarter. Housing data were the standout, existing home sales in June moved to an annualized rate of 5.5 million, the highest since February 2007. Strongconsumer spending was another bright spot. Data released so far in the third quarter — such as a slowdown in retail sales figures and weak readings on wage growth — have been mixed and helped push inflation expectations down on the prospects of lower than anticipated growth…

Summer Growth Concerns


U.S. Dollar Still Stands Tall

The U.S. dollar remains strong, defying some skeptics. As has been the case since late 2008 when the Federal Reserve (Fed) began its quantitative easing (QE) program, there has been a great deal of concern recently among some market participants that the dollar is on the verge of a significant decline. Although the dollar may have lost some market share relative to other global currencies in recent decades, it remains the dominant global currency (often referred to as a reserve currency) and we expect it to remain so for the foreseeable future.

The U.S. dollar is getting a lot of attention these days for many reasons. The dollar’s strength this year (+7% year to date based on the DXY U.S. Dollar Index) has had a negative impact on earnings for U.S.-based multinationals and contributed to fears of an “earnings recession” (not our expectation). Commodities, which trade in dollars globally, have been under pressure from the dollar’s strength beyond the impact of fundamental factors such as the slowing Chinese economy and oil’s high-profile global supply glut. Finally, some are worried that the dollar may lose its place as the leading reserve currency, which we discuss below.

US Dollar Still Stands Tall


Markets at a Glance

Markets at a Glance shows annual and YTD performance for a broad array financial market asset classes.  As the overall market moves through different cycles and environments, individual asset class performancecan also fluctuate. This report is helpful in illustrating the extent to which asset class performance can vary and the importance a well-diversified portfolio can have in minimizing these variations.

Markets at a Glance

Q2 Earnings Preview

Q2 earnings season may look a lot like Q1 as companies once again face the twin drags of the energy downturn and strong U.S. dollar.

The Thomson-tracked consensus is calling for a 3% year-over-year decline in S&P 500 earnings for the second quarter, dragged down once again by the energy sector and a strong U.S. dollar. We believe this earnings estimate can be exceeded due to the improving economic growth in the U.S. and Europe during Q2, and the low bar set by an above-average 4:1 ratio of negative-to-positive preannouncements (long-term average back to 1995 is 2.7) and recent earnings trends where the average upside “beat” over the past 16 quarters is 4%. An upside in-line with prior quarters would leave earnings up by 1 – 2% compared with Q2 2014, similar to the Q1 result (+2%). The biggest stories this earnings season will again be energy and the dollar, which are expected to combine for a roughly 10% drag on S&P 500 earnings overall. But these drags will potentially share the spotlight with two others: Greece and China. We expect corporate America to tell us that the knock-on effects on their businesses from turmoil in Greece and the bursting of China’s stock market bubble have been very limited and that earnings are poised to accelerate during the second half of the year.

According to the Thomson-tracked consensus, the strongest earnings growth in Q2 is expected to come from the financials and consumer discretionary sectors…

Q2 Earnings Preview


Greece: Post-Referendum Assessment

The Greek people had their voices heard on July, 5th and decisively voted “no” on the Greek referendum to accept the latest bailout deal from creditors. This outcome, which was surprising to many, will potentially raise the level of economic and financial market volatility in the weeks ahead, as global investors assess the risks associated with an increasingly likely Greek exit (Grexit) from the Eurozone and from the Eurozone’s common currency, the euro.

For the rest of the letter click here below.

Greece: Post-Referendum Assessment

Greece Playbook

Greece’s critical referendum took place this weekend and the Greek people resoundingly voted “no” — rejecting the latest bailout deal from creditors. The referedum result, which some interpreted as a vote to exit the Eurozone,  throws Greece’s future in the currency union firmly in doubt. The unexpected result has led to a roughly 2% decline in the broad European indexes but only a modest decline in the S&P 500 (as of 3 p.m. ET today, July 6, 2015). The negative market reaction in Europe is not surprising, given polls heading into the weekend suggested a vote for the bailout was more likely. The modest decline in the U.S. may suggest markets are increasingly comfortable with the situation. Here we try to answer the following questions:

1. Would a Greece exit (Grexit) from the Eurozone lead to contagion for global markets?

2. Will this latest Greece crisis result in a Lehman moment?

3. Is a deal that keeps Greece in the Eurozone still even possible

4. Does anticipated weakness in European equity markets present a buying opportunity?

We address these questions here and provide our playbook for investing in this environment.

Greece Playbook



Transports have lagged the broad market so far this year, causing many to wonder if that signals an impending economic and market downturn. We do not think so, and our claim is supported by the historical data. As we discuss transports’ efficacy as a leading indicator (so called “Dow Theory”), we provide analysis showing that transports’ weakness in recent decades has actually been a better buy signal for the stock market than a sell signal, and we reiterate our positive view of the industry. While the situation in Greece is uncertain and very fluid, we do not expect a potential breakup of the Eurozone to cause a recession or bear market in the United States, and we would be looking for opportunities to buy transports stocks — or stocks in general — on significant weakness, should it occur.


Concern that weakness in transportation stocks (transports) might be a warning for the broader markets comes from Dow Theory, one of the oldest applications of technical analysis. First developed more than 100 years ago by Charles Dow, founder of The Wall Street Journal, and refined by others, Dow developed two averages to measure stock market performance that eventually became today’s Dow Jones Industrial and Transportation Averages. During the Industrial Revolution, these averages provided a good representationof the economy. Today, if you want confirmation of a trend reversal for the broad S&P 500 Index that gives you a more representative picture of the U.S. economy, you would not necessarily look to transports, which play a smaller role in the current more service-based and technology-driven U.S. economy than they did in Dow’s day. You might instead look to the Nasdaq Composite, which represents We do not believe transports’ weakness is a signal of an impending economic and market downturn. Historical data suggest transports’ underperformance may actually be signaling a buying opportunity for the S&P 500 rather than a sell. We believe transports present an attractive investment opportunity for the second half of 2015.

Debunking Dow Theory



Expect the bull market to continue through 2015. In the stock market, 2015 has felt like déjà vu. In 2014, the year began with a tough first quarter and finished strong. After a weak start to the year, we believe that corporate America will provide a much needed boost for the second half and 2015 may also finish strong — providing the seventh year of positive returns, in the 5 – 9% range we forecast. We remain confident in our 5 – 9% total return forecast for the S&P 500 for 2015, although reaching that target will require a power boost from corporate America. Our forecast is in-line with the long-term average range of a 7 – 9% annual gain for stocks, based on the S&P 500 Index, since WWII. Our forecast is based on expected mid-single-digit earnings per share (EPS) growth for S&P 500 companies, supported by improved global economic growth, stable profit margins, and share buybacks in 2015, with limited help from valuation expansion. The S&P 500 Index is on track to meet that forecast by year-end, having returned 3.5% year to date through the end of May 2015 (and 3.5% year to date through June 19, 2015). However, headwinds that emerged early in 2015 mean getting there will require fresh batteries to fuel a second half charge….

Batteries Not Included: Midyear Stock Market Outlook