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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

 

DEBUNKING DOW THEORY

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.

WHAT IS DOW THEORY?

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

 

BATTERIES NOT INCLUDED: MIDYEAR STOCK MARKET OUTLOOK

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

 

2015 Midyear Outlook

The economy has delivered six consecutive calendar years of positive returns for stocks since the end of the 2008–2009 Great Recession, as measured by the S&P 500 Index; however, constructing a strategy for the remainder of the economic expansion will require a tricky assembly. Divergent monetary policies reveal an uneven global recovery that has triggered an uptick in stock market volatility. A few important pieces requiring assembly for the remainder of 2015 include…

2015 Midyear Outlook

Buying at Record Highs

The S&P 500 Index set several new all-time highs in 2015, with the most recent one coming on May 21, 2015. Each new record high, especially for an extended bull market,  begs investors to ask if the stock market is at its peak and poised to move lower. No one wants to buy at a top, watch price declines unfold, and wait an extended period just to recoup losses. How likely is that scenario? What exactly is the risk of buying at the top when there is an all-time high? We attempt to answer these questions. “Buy low, sell high” is one of the most recognizable stock market sayings. Investing when markets are at all-time highs would seem to fly directly in the face of this saying, leading many investors to believe that investing at all-time highs is a sure way to lose money. But is this really the case? Buying at an all-time high, especially several years into a bull market, can be unnerving. But looking at the odds that anygiven all-time high is followed by another all-time high within a certain time period can be reassuring. Analysis of the S&P 500 Index indicates that from the date of any given all-time high, the index has historically hit another all-time high within one month 91% of the time. Extending this time frame to three months increases those odds to over 97%, and extending to one year the odds approach 99%. Based on those odds, you have a very good chance of seeing another all-time high pretty soon after you buy on one….

Buying at Record Highs

 

ACA Ruling Could Make Healthcare Sector More Affordable

The upcoming Supreme Court decision regarding premium subsidies for the Affordable Care Act (ACA, aka Obamacare) may create a buying opportunity for the healthcare sector. We believe the odds favor the status quo (all subsidies legal regardless of the state), meaning that any selling pressure related to the risk of losing insured patients may present a buying opportunity. However, a court ruling in favor of the challenger (against the administration), which would likely be met witheven more selling pressure and remains a possibility, may create an even better entry point for the sector. Later this month, in the case of King v. Burwell, the Supreme Court will rule on whether ACA premium subsidies (via tax credits) are legal for individuals with Obamacare policies in states that chose to use federal health insurance exchanges rather than setting up their own state-run exchanges. When the law was written and subsequently passed in 2010, the hope in Washington was that all states would set up their own insurance exchanges for their citizens. Were this achieved, it would have eliminated the question of whether any subsidies that made insurance premiums more affordable were legal. The law is quite clear about the legality of premium subsidies in states with exchanges. However, the law is ambiguous aboutstates that opted not to set up exchanges, which is the crux of this case. Which way will it go? Our sources in Washington see 60% odds of the status quo (a ruling in favor of the administration), while we believe, based on the points below, that the odds may even be a bit higher. A favorable ruling for the administration could be based on three potential arguments:

1. The court may think the intent of the law and the broad context — including consideration for the conditions under which the law could reasonably function economically — are enough to essentially prove the IRS’s intention and uphold the status quo. The section of the law that allows for the federal government to set up an exchange if a state does not, points in this direction….

ACA Ruling Could Make Healthcare Sector More Affordable