Investment Committee Weekly Talking Points

After a month of absence, our investment team spent considerable time to discuss monthly events and how they have an impact on our investment strategies. We have published our 2nd quarter performance numbers, and you should see these results on our factsheets. For further details, please check our website and newsletters.

All Time Highs, Historical Low Volatility

As of July 13th, the Dow Jones Industrial Average closed at 18,356 and the S&P 500 closed at 2153. These indices are at historical all-time highs, yet many seem to wonder why the market is placing high value on the underlying companies. One of the beliefs by financial professionals is that interest rates are near zero or even negative. Negative or zero bonds on governments lowers interest rates causing many companies to refinance existing debt to lower rates. Many institutional investors, such as pension funds, depend on targeted returns. In the 1990’s, pension funds were invested in bonds yielding their target allocation. Today, bonds alone cannot meet their targeted obligations without being partially or wholly invested in the equity market, which causes an inflation in pricing of many securities. In essence, we are in a bit of a quandary, because of abnormally low interest rates.

The other major side of the picture is the abnormally low volatility in equity markets. Today, the VIX, which measures the volatility of the S&P 500, is hovering around 13.00. Normally, the VIX is around 18-20 with normal market fluctuations. When the Brexit vote happened, VIX was topped at 25.76, so apparently, the world was not falling after the vote that is going to shape the future of Europe. To many people outside of the financial industry, volatility is not an important topic of discussion, but to professional investors it is a, as one politician would say, “Huge” deal. A perfect example of how volatility is important is how much premium we receive in writing put or call options in our mutual funds. Options use volatility to their advantage when we write them in our fund, which gives greater potential income for our clients. We are satisfied with the uptick in the market, and we are optimistic about future opportunities. 

Housing and Job Report

Last week, the St. Louis Federal Reserve released unemployment numbers for the month of June. The unemployment rate increased slightly from 4.7% in May to 4.9% in June (St. Louis Fed). Nonfarm payrolls increased to 287,000, which was well above the predicted figure by the Federal Reserve. The labor participation rate is still continuing to decline to 62.7% in June. 

After looking at these lagging macro-level indicators, our team still believes these statistics do not give the full picture. The numbers were exceptional for the month of June, but the United States still is having difficulty retaining people within the workforce. 

On the brighter side of things, housing has continued to be exceptionally strong. According to the S&P First Mortgage Default Index, default rates are at .63% (S&P Dow Jones Indicies). In 2008-2009, this rate was closer to 5.5-6%. Nationally, the prices of houses are incrementally moving back towards pre-recession levels, and in major metropolitan areas, housing is starting to settle above recession levels. 

Crude Support

For the first time this year, North American rig count has increased. Since the height in oil prices in October 2014, rig count has declined 78% from 1609 to 351 (Trinder). In the coming months, our team believes we will start to see a gradual increase in rigs to meet supply. This evidence partially supports our target for oil between $50-60 by the end of the year. 

Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Sarah Berndt, Portfolio Manager

Eric Kartman, Research

Drew Steinman, CPA, Trader/Research

Frank Echelmeyer, MBA, Advisor Consultant

-for Broker/Dealer and RIA use only-

Works Cited

S&P Dow Jones Indicies. Case-Shiller U.S. National Home Price Index. July 216. July 2016.

St. Louis Fed. Federal Reserve Bank of St. Louis. July 2016. July 2016.

Trinder, Philip. mlpportocol.com. July 2016. 2016.

Disclosure

The materials presented is for use by professional advisors only.  It isintended as informational and educational, and is not intended to be interpreted as investment advice.  The references to specific investment ideas, be they concepts, trends, sectors or even specific securities, are not recommendations for any advisor to adopt for any of their clients.  No investor or client reading these materials should view them as investment advice.  These materials are to be utilized as a catalyst for thought and discussion regarding the economy, investments, and responsible investing in general.  Past performance is not necessarily indicative of future returns, and there is no guarantee that any information presented herein will contribute to a profitable portfolio.  All facts referenced herein are derived from sources believed to be reliable.  

The S&P 500 is an unmanaged index used as a general measure of market performance.  You cannot invest directly in an index. Accordingly, performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.