Capital Market Commentary – August 2016

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update

The economy continued to move forward into the seventh year of post-recession recovery. The first quarter growth in the U.S. economy was 1.1%. The following summarizes certain issues we think are worth watching:

  • Brexit shook the markets in June. Britain’s vote to leave the European Union has caused the market additional concern about world-wide economic growth prospects.
  • This adds to the existing concerns about growth potential in the world’s second largest economy, China.
  • ƒThe Federal Reserve is in a holding pattern as we approach its late September policy meeting. Most believe that the Fed wants to continue to move interest rates upward, but they are being cautious.
  • ƒJune’s job growth report indicated a renewed momentum in the labor market. After a dismal report in May, the job growth in June exceeded most analysts’ expectations. Unemployment was reported at 4.9%. This falls within the Fed’s normal long-run employment target of between 4.5% and 5%.
  • ƒThe tightening job market has put upward pressure on wages as employers are in competition to find workers. The average hourly earnings for private-sector employees was estimated to have increased 2.6% in the last year. This is the highest growth in wages since 2009. Since 2000, median household income (adjusted for inflation) has dropped 7%. Thus rising wages is a positive sign for future consumer spending.
  • The global issues have caused the U.S. dollar to gain value. The dollar has increased in value almost 10% over the last year. This increase makes U.S. exports more expensive.
  • ƒƒBusiness investment has been slowing. Companies have been hesitant to invest in machines, technology, and inventory. The level of business investment in capital goods has declined nearly 12% since 2014.
  • ƒOil prices continue to remain well below historical levels. This has impacted the market in a variety of ways. Consumers and businesses have benefited from lower gasoline prices. However, the oil production firms have been hard hit and banks are being forced to strengthen their loan loss reserves for struggling oil related
    firms.
  • After years of volatility, home prices have grown at an annual rate of approximately 5% since early 2015. Increasing home prices and low mortgage rates have made the housing market one of the strongest sectors in the U.S. economy in recent months.
  • We are now approximately three months from electing a new President. The differences between the two candidates appear to be dramatic. The uncertainty surrounding the election will impact the markets until after the election.

Short-term interest rates remain historically low with the 3-month T-Bill ending June at 0.26%. The 10-Year T-Note ended June at 1.49%, down 78 basis points from year-end 2015. This has led to a significant reduction in the slope of the yield curve.

The stock market performance in 2016 has been mixed. The Dow Jones Industrial Index closed June up 2.90% for the year. The Nasdaq Index closed down 3.29%. The Nasdaq Bank index ended June down 4.18%. Larger U.S. banks fared even worse, ending the first half of 2016 down 11.25%.

Interesting Tid-bits ƒƒ

  • Lost value. Since the start of 2016, 20 of the world’s largest banks have lost a quarter of their combined market value. In total, approximately $465 billion has been lost.
  • ƒƒPrinting money? The Fed owns approximately $2.4 trillion in U.S. Treasury debt at the end of June. This represents approximately 20% of the total U.S. Treasury Debt.
  • ƒƒThe wealthy get richer. It was recently reported that the top 20% of American families account for 48.9% of total U.S. income compared to 44.3% in 1990.

Merger and Acquisition Activity
In the first half of the year, there were 114 bank and thrift announced merger transactions. This compares to 139 deals in the first half of 2015. The median price to tangible book for transactions involving bank sellers was 131% which is down from the 141% median recorded in 2015.