Stocks Rally Around the Globe as Low Rates Likely to Continue - Alaska Permanent Capital Management


Stocks Rally Around the Globe as Low Rates Likely to Continue

CaseStocks continued their rally capping a second week of gains. The S&P 500 was up 3.2% and finished Friday at 2,015. Both the Dow Jones Industrial Average and the S&P were up over 3% this week, one of their best five day performances this year. The NASDAQ Composite lagged with a gain of just 2.6%, as biotech shares have been under pressure as of late.

Treasury bond yields moved higher by about 9 basis points this week. The ten year Treasury now yields 2.09% while the 30 year offers 2.92%.

Overseas equity markets saw sizable gains as well. Shares in Europe and Japan were up about 4 or 5% depending on the market. Additionally the dollar fell against the euro as the perceived chance of higher rates in the U.S. diminished this week. It now takes about $1.14 to buy one euro, up from a low of $1.05 earlier this year.

Equity markets rallied on Thursday and the S&P 500 rose to a seven-week high after the release of minutes from the Fed’s September meeting. The minutes showed the Fed was close to raising the federal funds rate based on data from the U.S., but ultimately decided to wait based on recent market events and the economic slowdown overseas. The perceived dovishness of these minutes combined with the week payroll number from last week has pushed traders’ expectations for a rate hike well into 2016. Futures are calling for roughly just a 10 percent chance of any change at either of the two remaining FOMC meetings this year, but also do see about a 90% chance of a hike by the end of 2016. While the consensus does seem to be quickly moving to 2016, Chair Janet Yellen did still state just a week after the meeting that a 2015 hike remained on the table. Given the recent rally in stocks it would seem the markets are calling the Fed’s bluff and that the liquidity punchbowl won’t be going anywhere anytime soon.

Other economic data out this week included two different service sector indices and a reading on consumer credit that were all below expectations but still remained solidly in expansion territory. Weekly jobless claims, which had been pretty steady, declined by 13,000 to 263k this week, their lowest level in 10 weeks. The decline highlights a labor market that continues to tighten, even if overall job growth is modest.

Third quarter earnings season kicked off this week with the traditional announcement from aluminum producer Alcoa. The report was weak and sent its stock lower as quarterly sales came in below forecast with a decline of almost 11 percent (not surprising given the continued commodity slump). The next couple of weeks will bring a flurry of results. Aggregate earnings for the S&P 500 are expected to be down 4.8% on a YoY basis, but up 3.4% if the abysmal results from the energy sector are excluded.

The head of VW’s U.S. operations was dragged before congress this week for his 15 minutes of public shame as fallout over the company’s emissions cheating scandal continues. The company also announced its plan to fix the problem vehicles mostly involve new software and larger catalytic converters. The saga and its implications are far from over as it is expected to take at least 18 months to implement the fix and the new CEO suspended all unnecessary capex and research to save costs. It is estimated that this scandal could shave about 0.2% off of German GDP growth this year.

Bill Gross, the former famed portfolio manager and “Bond King” of PIMCO, filed a lawsuit against his previous employer this week claiming damages in the “hundreds of millions of dollars.” Recall it has been just over a year since Gross’s abrupt and acrimonious departure from the asset management giant that he founded. The complaint characterizes Mr. Gross as the victim of a “cabal” of PIMCO employees who “at the expense of investors and decency…plotted to drive [him] out.” Allianz, the German insurer and majority owner of the firm, of course says the lawsuit has no merit. According to Mr. Gross’ lawyer, any proceeds from this legal action will be donated to charity.

Monday is the Columbus Day holiday and the bond market and banks will be closed (along with APCM). Equity markets will be open.

Nicholas Case
Senior Investment Analyst


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