Stocks endured a bit of a bumpy ride early on in the week but managed to post a modest gain, as the S&P 500 was up 0.7% for the week at Friday’s close. The Dow Jones Industrial Average had similar results while the NASDAQ composite lagged with a small gain of 0.1%. So far in 2015 the S&P 500 has returned 2.9%, the Dow is down by 0.4%, and the NASDAQ is up 7.5%.
Global equities sold off hard on Tuesday and into Wednesday as markets were roiled by an unexpected and substantial devaluation of the Chinese Yuan. The decline in the S&P 500 from Monday’s close to midday Wednesday peaked at nearly 2.5%, but the index went on to recover most of what was lost during the latter part of the week. The drop in the Yuan was the largest devaluation since 1994 and came along with some poor economic data out of China, as industrial production came in well below estimates with a gain of only 6% YoY (industrial production in China has averaged gains of 10.3% YoY during the past five years).
In recent months China has turned into an economic enigma as investors struggle to determine just how strong the underlying economy really is. With the latest devaluation move by the PBOC, some are concerned this is an attempt to return to the tried and true export led growth model that worked for so many years. Exports benefit from a cheaper Yuan as the same amount of Dollars or Euros can now buy more goods. However, while the move this week was a surprise, the central government insists that it was simply a part of the process in allowing the Yuan to trade in a more market-oriented manner. The real question though is if there will be similar moves in the future. Immediate fears of that were calmed on Friday after Beijing set the daily reference rate slightly higher than the day before. The attached chart shows the value of the Yuan against the dollar over the last five years.
U.S. Treasuries ended the week just about flat, with changes in yields across the curve of three basis points or less. However, similar to the stock market, bonds did have some intra-week volatility as the 10 year Treasury yield hit a low of 2.04% on Wednesday before closing at 2.20% on Friday.
It was a relatively light week for economic data in the U.S., however retail sales showed a healthy 0.6% MoM increase in July. The gain was helped along by strong auto sales. Prior readings for June and May were also revised upward which furthered the positive aspect of the report. It has been long anticipated that a boost in retail sales would materialize as a result of the drop in commodities over the past year. Furthermore, this is one of the many indicators that the Fed is watching to gauge the U.S. economy’s general health and its ability to withstand a liftoff in short term rates.
G is for Google and A is for…ALPHABET! The company behind the world’s favorite internet search engine, the Android mobile operating system, and self-driving cars announced this week that it is restructuring itself into a holding company called Alphabet. Google (the search part of the business) will be one of the many wholly owned subsidiaries of the new parent, with other ventures such as Nest (internet connected thermostats), Fiber (high speed fiber optic internet service provider), and Calico (biotech arm aimed at defeating aging) also falling under the Alphabet umbrella. Upon the announcement, analysts immediately made the comparison between the new structure and that of Berkshire Hathaway – the holding company controlled by Warren Buffett. There is one large difference though, as most of Buffett’s companies are profitable. Google on the other hand is comprised of one giantcash cow (selling ads that display in internet searches) and a whole bunch of mooching family members which despite their ambitious dreams currently lose a lot of money. One possible outcome of the new structure could be to provide investors more transparency as to the health of the main firm and the financial impacts of the more fanciful investments.
It looks like cool and wet conditions are on tap for the weekend here in Anchorage. Good luck to all the 2,700+ racers in the Big Wild Life Runs on Sunday!
Senior Investment Analyst