Keep Your Powder Dry

Reports of ongoing global market volatility are taking a toll on consumer confidence. However, compelling opportunities await patient investors.

August 06, 2015    |    By Scott Minerd, Global CIO

Global CIO Commentary by Scott Minerd

Market volatility tends to move higher in late summer as trading volumes get thinner. During these testing times, economic news tends to have a bigger psychological impact, not just on investors, but also on consumer confidence.

As a case in point, euro zone retail sales fell by 0.6 percent in June. While June’s year-over-year performance was still positive, its 1.2 percent growth represented the weakest reading so far this year. In Germany, the euro zone’s largest economy, retail sales fell 2.3 percent month over month in June as headlines and consumers focused on continued instability in Greece. Analysts had predicted 0.3 percent growth. These data points highlight just how fragile consumer sentiment can be.

Caution is still the watchword for the months ahead, but keep your powder dry for compelling opportunities in #energy.


Chinese consumers are also showing signs of headline fatigue. China overtook the United States as the world’s largest automotive market in 2009, but in June, growth in year-over-year new car sales fell into negative territory for the first time in over two years, a clear sign that the decline in Chinese equity prices is negatively affecting consumer sentiment. Additionally, the Caixin manufacturing purchasing managers index (PMI) for July dropped to a two-year low of 47.8.

Flagging markets outside the United States increase its safe-haven status in the minds of investors, especially for U.S. Treasuries. But here, too, uncertainty is dampening buyers’ moods. The U.S. Federal Reserve’s post-meeting statement last week set the stage for a rise in interest rates sometime later this year, but the tone of the statement, while hawkish, also stressed a lack of exigency. Without any concrete guidance, investors will scrutinize the summer’s many forthcoming economic data releases for any insight into the Fed’s timing. Ultimately, we will get a Fed rate increase and the market will inevitably have to come to terms with it, but the transition will not be smooth. All told, I anticipate an even wilder ride in the months ahead than the one we have already endured. Outcomes, such as a decline in U.S. equity prices or a sharp decline in interest rates, are not unlikely or unexpected.

Given this current backdrop, I see no urgency to put money to work. There is very limited upside for risk assets, and probably some meaningful downside over the course of the next few months. Nevertheless, the U.S. economy remains strong, and until we start to see some sort of decay in leading economic indicators, I’m not overly concerned that the current expansion is coming to an end. I do believe, however, that caution is still the watchword for the months ahead. Investors may eventually see some compelling opportunities to step in, probably in the energy sector. In the meantime, keeping your powder dry and booking some gains would seem the most prudent thing to do.

Summer’s Poor Risk-Return Tradeoff

The summer months have become synonymous with market underperformance. Using the Sharpe Ratio as a measure of risk-adjusted return, the chart below indicates that the May-to-September period offers the lowest average excess return on the S&P 500, per unit of volatility, when measured against 10-year U.S. Treasury yields. August and September have an especially poor historical risk-return tradeoff.

S&P 500 Sharpe Ratio Seasonality over the Past 25, 50, and 75 Years

Summer’s Poor Risk-Return Tradeoff

Source: Bloomberg, Guggenheim Investments. Data as of 7/31/2015. Note: To ensure comparability, months with negative Sharpe Ratios were tested with the Israelsen-Modified Sharpe Ratio, which returned near-identical performance ranking within each data series.

Economic Data Releases

U.S. Economy Adds 215,000 Jobs in July as Personal Spending Creeps Higher

  • American payrolls expanded 215,000 in July, marginally below a revised gain of 231,000 jobs in June and slightly below analyst expectations. The unemployment rate was unchanged at 5.3 per cent. Average hourly earnings increased 2.1 percent year over year in July, slightly below expectations.
  • Personal income grew 0.4 percent in June, just ahead of the 0.3 percent rise analysts expected.
  • Consumer spending rose 0.2 percent in June from May, in line with expectations. May’s 0.9 percent rise in spending, however, was revised down to 0.7 percent.
  • The Institute for Supply Management’s services sector index rose to 60.3 in July, its highest reading since August 2005.
  • The June year-over-year core personal consumption expenditures index, at 1.3 percent, was unchanged from the previous month's revised reading.
  • U.S. manufacturers expanded at a slower pace in July, according to a survey released Monday by the Institute for Supply Management (ISM). The ISM’s manufacturing PMI fell to 52.7 in July from 53.5 in June.
  • U.S. factory orders bounced back from a poor showing in May, rising 1.8 percent in June. The latest print, which matched analyst expectations, followed two months of declines.
  • On Wednesday, the Commerce Department said the U.S. trade deficit increased 7.1 percent to $43.8 billion in June. May's trade gap was revised down by $1 billion to $40.9 billion.
  • U.S. jobless claims edged up last week. The number of Americans applying for initial jobless claims rose to 270,000 from 267,000 the week before.


Euro Zone Consumers Fail to Light Up June, but German Factory Orders Get a Boost

  • Euro zone retail sales fell 0.6 percent in June from a month earlier, putting the year-over-year increase at 1.2 percent—the weakest pace so far in 2015, according to figures from Eurostat.
  • Germany's monthly industrial production fell by 1.4 percent in June. Analysts had expected it to rise 0.3 percent. German exports were down 1 percent on May.
  • Factory orders in Germany climbed 2 percent in June from May, far exceeding the 0.3 percent rise economists had predicted.
  • The upward revision to July’s euro zone composite PMI, to 53.9 from 53.7, left it below June’s reading but in line with the second-quarter average.
  • The U.K. PMI for the manufacturing sector ticked up to 51.9 for July from 51.4. This was better than the 51.5 reading expected by economists.
  • The U.K. services PMI fell to 57.4 for July from 58.5 the previous month. However, the reading remains well above 50, the level that divides growth and contraction.
  • The final reading of the July Caixin PMI fell to 47.8, down from 49.4 in June, a two-year low.


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