The Dog Days of August - Alaska Permanent Capital Management


The Dog Days of August

Jeff-PantagesWith summer vacations underway, things often slow down in the August heat. That’s true in the markets as well, as trading volumes tend to taper off. This past month was the second least volatile month for the S&P 500 over the past decade.

Most equity markets were in the range of flat to up 1% in August. The S&P 500 returned 0.1%, but has gained a respectable 7.8% year to date. Emerging market equities stood out gaining 2.5% on the month, bringing their year to date gains to 14.6%. After having soared for much of the year REITs lost 3.8%. Still, the commercial property sector is up 13.9% year to date as investors continue to search for yield, which REIT dividends provide.

Interest rates edged slightly higher but have remained in a narrow trading range for much of the summer. The Barclays Aggregate bond index was flat for August, but has gained 5.9% year to date.

These improving markets are a far cry from the way the year began. Recall China worries, falling oil prices, and recession fears resulted in a sharp selloff in the equity markets that lasted through mid-February. Since then oil prices have rallied $20, China has steadied, and so has global growth. Even the Brexit vote, which threw a spanner into things, proved only a temporary setback. Indeed the British economy and stock market are doing fine.

All eyes continue to focus on the Federal Reserve and prospects for an increase in interest rates. They have acknowledged that the US economy is doing better with “labor market conditions improving” and consumer spending solid. Inflation may be picking up, but it is still less than 1%, although core inflation (ex food and energy) is now above 2% year-over-year (YoY). While, APCM expects a hike in rates before year-end, recent speeches by Fed officials suggest a very slow pace of rate hikes going forward.

In fact, John Williams, President and CEO of the Federal Reserve Bank of San Francisco, was here in Anchorage last month speaking to AEDC. He offered up a “new normal” long term forecast of subpar economic growth and a very low “natural level” for interest rates for an extended period.

Business spending has been disappointing for several years now and has been a drag on economic growth and productivity. CEOs seem to view the outlook as uncertain and are wary of increasing regulations. Earnings have been soft of late, but that hasn’t stopped management from increasing dividends. And they have used easy access to the bond market and ultra-low rates as a reason to issue debt and buy back their own stock.

This can’t go on forever. It’s important for earnings to pick up and be sustainable for stock prices to continue their march upwards. Most analysts believe a turn towards better earnings is underway, but not until the fourth quarter, where a rise of 5.5% YoY is expected.

A word on the US election: The rhetoric is pretty mean spirited. I suppose that is often the case. Politics ain’t beanbag. Both candidates have high negatives and are not particularly well liked by the general electorate. From a strictly market perspective, investors seem to believe Hillary is the “least bad choice” and expect her to win. I think that is being priced in, and a Trump win would be a surprise for the markets.

While there is a lot of passion and anxiety on both sides it is useful to remember that the Founders (Washington, Jefferson, Madison, Hamilton, etc.) created a system of checks and balances via our three levels of government to restrain factions and prevent any one branch having too much power. This historically meant change happens incrementally.

James Madison famously said, “If men were angels, no government would be necessary.” The implementation, via the Constitution (ratified in 1788), of his belief that government powers had to be dispersed and decentralized has served the nation well for almost 230 years. It’s a safe bet that it will continue to do so.

I hope everyone’s had a great summer and enjoyed the Labor Day weekend. By the way, September 16 is Constitution Day.

Jeff Pantages, CFA®
Senior Vice President – Investments


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