The Chinese sell off resumes. After three weeks of successful turnaround in the Chinese market due to significant government intervention including frozen trading, suspended IPOs, and a $500 billion rescue fund, the Shanghai Composite has fallen again, this time down 11 percent in three days. Certain analysts go as far as to state the current trading patterns in China resemble the selloff during the 1929 U.S. crash that ultimately led to the Great Depression. In an attempt to boost weak investor sentiment, the Chinese government continues to utilize its market stabilization fund and print optimistic reports in its state-controlled equity market newspapers. Emerging markets such as China remain incredibly unpredictable. See Voya’s Senior Market Strategist Karyn Cavanaugh on CNBC last week on how to navigate through this ever volatile emerging market.
The recent whirlwind of housing data released has given investors mixed feelings. Last week strong numbers from housing starts, up 9.8 percent, and building permits, up 7.4 percent, were released. On Wednesday existing home sales rose 3.2 percent, the fastest rate in over eight years. Additionally steady employment and favorable buying conditions look to support the housing market in the upcoming months. However today’s new home sales, down 6.8 percent is at odds with what seemed like an optimistic housing market. This negative 6.8 figure is the lowest since November and weaker than any forecast. Instead of risking it all on an unpredictable piece of real estate in this uneasy market, investors have the option of global REITS. Traded in nearly 40 countries, these investable securities of real estate companies offer effective global diversification through their low correlation rate with the rest of an investor’s portfolio. Turn to page 72 and page 73 of the Voya Global Perspectives™ book to see how global REITs can add international exposure to your portfolio.
The weekly jobless claims were released this morning, falling to 255,000 from 281,000 the previous week. This substantial drop brings claims to a historic low; the 255k mark is the fewest since November 1973. A labor department spokesman attributed the surprisingly low level of claims to employers retaining workers in a response to heightened demand and new growth initiatives. The labor official continued to state that volatility of this size is expected this time of the year due to auto plants preparing for the new model year and schools adjusting staff during the summer holiday. Strong numbers such as these tie into the Fed raising rates. Just last week Fed Chairwoman Janet Yellen noted there is still “slack” in the labor market. The 255k number combined with the low 5.3 percent jobless rate may lessen the slack Yellen was talking about and put the U.S. on track for a September rate hike.
In Case You Missed It
In the most recent Voya Global Perspectives Webinar, Douglas Coté, Voya Investment Management Chief Market Strategist, discussed good news from the first half of 2015, and expectations for the second half of the year. Watch the replay now.
The People’s Bank of China is firing on all cylinders intervening in the economy in an attempt to stabilize economic growth and structural adjustment. The PBOC will add $45 billion to the Export and Import Bank of China in addition to $48 billion into the China Development Bank. Furthermore the MOF recently funded the Agricultural Development Bank of China with $16 billion worth of aid. These massive policy bank reforms are part of the “one belt one road strategy” and part of a financial system moving from policy-directed lending to market-based lending. The PBOC’s overhaul reforms are evidence that China’s economy is in trouble but unlike the Eurozone, China is taking aggressive action to do what it takes to reform their economy. Look to the Voya Global Perspectives™ Midyear Update to see China’s effect on global growth.
Gold has taken a hit. This precious metal suffered its eighth straight day of losses Monday bringing it to its lowest level in over five years. Analysts attribute this meltdown to a number of factors ranging from a reduced need for inflation hedges and the end of the Greek drama to a strong U.S. dollar and looming interest rate hike. As for involving gold into your portfolio, the yellow metal has been an effective diversifier in times of rampant Central Bank stimulus, perennial banking crises and geopolitical instability but, not so much during the current "normalization" period we are in. In fact a "real return" or asset class return minus inflation has not come from "real" assets like commodities but from stocks and bonds instead. Review page 53 of the Voya Global Perspectives™ book for an extended look at the history of gold.
The S&P 500 inched closer Thursday – up 0.57 percent to 2119.46 – to its all-time high of 2134 on May 21st. Spurred by strong large cap corporate earnings and the Greek passage of a bailout deal, the Standard & Poor’s 500 sales growth has moved back into positive territory after suffering a 4 percent loss earlier this month from international issues in China and Greece. With volatility like this, it is important to take a step back and remember resilience will prevail. Fundamentals, specifically large cap corporate earnings, drive the market and so far quarter two earnings have been generally positive excluding minor hits in the industrial and gas sectors. At key times such as these, a position in large cap equity should be considered to take advantage of this ever-growing bull market. Investors who bailed when Greece missed its end of June payment deadline missed a 3 percent S&P return so far in the month of July alone. Please read page 6, page 7, and page 8 of the Voya Global Perspectives™ book to see how a stance in large cap equity can help grow your portfolio.
Sometimes geopolitical brinkmanship can become so predictable – enough to inspire yawns. But, lo and behold, Greece passes the required reforms, gets its sorely needed bridge financing to pay its loans – albeit with more borrowed money – and avoids a Grexit from the Euro and certain economic collapse. Global markets continue to applaud. Meanwhile, Fed Chair Yellen gave her semiannual testimony before Congress yesterday, revealing little of when or how the Fed will raise interest rates but saying, in the press conference, that the longer it waits future rate increases may have to be more pronounced. Please read Voya Global Perspectives™ Midyear Update on our prior expectation of an 11th hour Greece agreement.
As U.S. record level M&A heats up this summer, this activity has drawn the attention of international investors, especially China. Just recently, a Chinese state-owned technology firm offered an enormous $23 billion bid for a U.S. technology company in the Russell 1000 Growth index, a would-be record amount for any Chinese takeover of a U.S. firm. This bid along with numerous other large cap growth offers this year reflects a widening popularity in this sector. Chinese firms, along with other investors, are offering massive premiums to acquire these large cap growth companies, proving that this investment class has significant and compelling value. To make the most of this growing asset class, it must be included as part of a properly diversified investment strategy. Refer to page 5 and page 17 of the Voya Global Perspectives™ book to see how including a large cap growth asset can help maximize your returns.
Fundamentals drive markets and there is no more telling fundamental than corporate earnings aka “the bottom line”. Second quarter earnings have kicked off. So far, they are dripping in positive but will be in full swing in the next few weeks. Expectations of -4.1 percent for the quarter are similar to the first quarter but, like last quarter, we expect it to squeak out another positive due to overly pessimistic expectations. Meanwhile, another proposal is on the table; this time, an Iran Nuclear Deal. But, geopolitics doesn’t trump fundamentals which have been broadly positive despite weaker than expected retail sales this morning. Markets are back to positive for the year and bond yields have surged on this good economic data. A strategy that is making a comeback is senior loans or floating-rate loans that are a good hedge against unexpected rising rates. Please see Voya Global Perspectives™ page 8 for corporate earnings and page 28 for “Senior Loans and Rising Rates”.
Back to back rallies in global markets because of the Greece economy, that is 0.2 percent of the Eurozone, is astounding. Or maybe it is just a normalization of markets after the perennial Greek tempest. Many unfortunate investors have been whipsawed in 2015 and here it goes again; selling into the noise and media hype. It is clear that Europe needs Greece and Greece needs Europe which is why the market is rallying on the prospect of a third bailout and not the actual signing of a bailout – so Grexit is off the table. The terms are billed as “tough” but really are similar to those agreed to in years past, which have yet to be implemented. Management of the structural reforms and privatization will be by the retro “troika” which includes the ECB, IMF and European Commission. Don’t think that the U.S. is not participating since we fund 17 percent – more than next 3 countries combined – of the IMF budget. Meanwhile the fundamentals continue to march on and bond yields in the U.S. have bounced reflecting increased confidence in the economy. Please see Voya Global Perspectives™ Midyear Review on investing in these volatile markets.