Market Insight - July 2015

"όδός άνω κάτω μία καί ωυτή"

    “The way upward and the way downward is one and the same”
      Epigraph, Heraclitus, Fragments

Markets were stung painfully in the final days of trading as fears of a Greek default, exit from the euro, and the potential for resulting instability chased investors to safe havens, and wiped out most stock gains for the year to date. As Greece passed its deadline for repayment of its IMF loans, contradictory statements and positions multiply, and financial markets are reacting to news in real time.

Tragedy or farce? Sophocles or Aristophanes?  The most imaginative playwright could scarcely have scripted the messy unfolding of events in Europe.  While the final act has yet to be played (the proposed EU reform package was soundly rejected on Sunday July 5) the intransigent position of Greek Prime minister Tsipris actually raised expectations that his hard line would give him the best credentials to present and sell a necessary set of reforms to the weary Greek public. These hopes were dashed when negotiations were broken off, a snap referendum was called, and Tsipris recommended a no vote. controls are now in effect, Greek banks remain shuttered for over a week, and the Greek economy is grinding to a halt. The resignation of their finance minister on Monday July 6, ostensibly to smooth the way for further negotiations, provided a very dim flicker of light at the end of the tunnel. 

The S&P 500 and the Dow both were virtually flat for the year after a flurry of selling in late June; large company stocks reacted to growing concerns over earnings and appropriate valuation given the global turmoil. Consensus year–over-year earnings for the second quarter are projected to decline by 4.5%; forward price earnings numbers, a measure of sentiment and valuation, are near 16.7, and above the ten year average of 14.1. For companies issuing earnings guidance to date, negatives outweigh positives by more than two to one.

Smaller companies made a somewhat better showing; the S&P Small Cap 600 gained 3.8% while the Mid Cap 400 index added 3.9%. Surprisingly, international investments also made gains, helped by currency translation. The MSCI Developed Market index in US dollars, after giving back half its 2015 gains in the final days of June, still rose 5%, while emerging markets added a fraction of a percent. Cohen and Steers Realty Fund, which gained over 20% in 2014, ended the second quarter off more than 11% year-to-date. Our primary sector investment, the IShares biotechnology index (IBB) gained over 20%.

All sectors of the fixed income market fell during the first half of 2015; yields climbed as investors anticipated Fed action on short-term rates later this year. The benchmark 7-10 year Treasury index lost 1.25%, and investors bid up yields to over 2.4%. For most asset classes, however, excluding longer term bonds and developed market bonds, interest income brought returns close to the flat line for the year. 

At the June meeting the Fed reiterated their data driven approach, as well as their expectations that the second half would show economic gains in three critical areas, GDP, jobs and wage growth, and core inflation. If the economy keeps improving, the Fed will likely raise its key short-term rate in September. However, the final June jobs report was slightly below consensus, and wage gains were flat, compared with a consensus estimate of a .3 % gain. Employers are hiring, but job openings remaining vacant longer. Is it a mismatch of skills and job requirements, as many say, or is this really a symptom?

One of the issues, we believe, is that worker mobility is becoming bogged down by home equity concerns. This seems to get very little attention.  Despite what we read, rising real estate values are not righting everyone from upside down mortgages. Those workers who could sell their homes and move for better employment opportunities may have already done so.

Yours truly,


Steven Weber                   Gigi Maxfield                     Frank Weber

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