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New Sector Joining S&P 500 Index – Equity Markets Update

Domestic stock market indices closed at new highs in August as earnings and economic data helped propel equity prices. Even with recent new highs, volume remains relatively low. Some market analysts believe that the increased regulation of banks and brokerage firms has taken a toll on trading. The use of various derivatives have been discouraged by regulators, which have in the past added activity and volume to equity markets.

The positive performance of the high-yield bond sector so far this year is indicative of improving credit characteristics for smaller company stocks. Since most smaller companies tend to rely more on debt for cash flow, a continued low rate environment has been beneficial for earnings and growth.

The S&P 500 index is adding a new sector to its mix. REITs will become part of the S&P 500 compilation on September 16th, making it the 11th sector. The growth and capital representation of REITs in the markets will now formally allow REITs to sit along side the other 10 sectors as a standalone class. REITs have been part of the financial sector for years, but now have earned their own designated category.

REITs have become increasingly popular with investors as their management teams have become more professional and the companies have become larger. There are two main types of REITs, equity REITs and mortgage REITs. The newly added sector will only include equity REITs that own physical property such as apartments, office buildings, industrial buildings, malls, hotels, cellular towers, data storage facilities, self-storage facilities, movie theaters, timber and even prisons.

REITs currently constitute about 3% of the S&P 500, so it is estimated that the newly created 11th sector will make up about 3% of the total index.

Sector weightings comprising the S&P 500 vary as the economy shifts and industries evolve. Technology currently encompasses the largest portion of the S&P 500 at 21%, yet made up as much as 35% in 2000 during the height of the technology boom.

Sources: S&P, Bloomberg, Global Industry Classification Standard (GICS)

International Update – September 2016

Social and political unrest in South America prevailed. As the Olympics in Rio were concluding, Brazil voted to impeachment its president due to improper handling of government funds. The continent’s top oil producer Venezuela, continues to struggle with the drop in oil prices, which has caused widespread food and medical shortages. Such instability can trouble local financial markets and foreign companies trading with South American countries.

Fallout from Britain’s vote to exit the EU has led to Britain’s central bank, The Bank of England to launch its biggest stimulus package since the financial crisis began. It will be its first rate cut in more than seven years with a new £70 billion bond-buying program. The bond-buying program will include £10 billion sterling denominated investment-grade corporate bonds and the remaining £60 billion will comprise purchases of government debt. Britain’s central bank also issued a negative outlook, stating that British households faced a poorer future. The Bank of England is forecasting that unemployment will rise, housing prices will fall and inflation will go up.

Emerging country equities and debt continue to be in demand as developed country bonds flirt with negative yields. The amount of global negative yielding debt has now risen to $12.64 trillion, and is dominated by European and Japanese bonds.

Sources: Eurostat, Reuters, Bloomberg, Bank of England

How Age Determines What We Spend On – Consumer Demographics

Demographics play a significant role in how much we spend and how we spend it. Spending is primarily dictated by age where different needs and life essentials change and evolve as consumers grow older.

Housing, transportation and food are the three largest expenses incurred by all age groups. As consumers move from their late 20s into their 30s, we earn more money and families start to grow. Expenditures on transportation, health care and entertainment become prevalent as households grow with children.

As we earn more, we also tend to save more in our 30s, 40s, and 50s by contributing to 401k plans and retirement savings. At 75 years of age and older, our retirement savings start to reduce as withdrawals increase to replace lost earned income.

Sources: Social Security Administration, U.S. Census Bureau

Bank of England initiated its first rate cut in more than seven years

Continued Low Rates – Global Fixed Income Update

Short-term U.S. bonds have been rising slowly as long-term bond yields have been dropping, leading to a “flattening of the yield curve.” Such a dynamic helps bond analysts and economists to determine if there’s an economic slowdown or even inflation on the horizon.

The Bank of England launched its biggest stimulus package since the financial crisis with its first rate cut in more than seven years and a new £70 billion bond-buying program. The bond-buying program will include £10 billion sterling denominated investment-grade corporate bonds and the remaining £60 billion will comprise purchases of government debt. Britain’s central bank, the Bank of England, issued a negative outlook, stating that British households faced a poorer future. The Bank of England is forecasting that unemployment will rise, housing prices will fall and inflation will go up.

The Bank of England is joining central banks in Japan and the eurozone in buying large amounts of sovereign bonds, as global benchmark yields continue to descend to new lows, exacerbating the matching of future long-term liabilities for pension plans and insurance companies. The amount of global negative yielding debt has now risen to $12.64 trillion, and is dominated by European and Japanese bonds.

The Fed continues to be at odds with other central banks worldwide, as lower rates and stimulus efforts are underway in Europe and Japan, while the Fed prepares to tighten in the United States.

Sources: Bank of England, Eurostat, U.S. Treasury

Cheap Oil Affects Countries Worldwide – Oil Industry Update

A non-routine meeting set for late September in Algeria disrupted oil markets as the meeting was seen as a precursor to production level changes. Non-OPEC member Russia, the world’s largest oil producer, is set to attend the meeting and could announce moves to help stabilize oil prices. Low oil prices have created a precarious situation for those countries that primarily rely on oil to keep their economies intact.

Venezuela, the leader in proven oil reserves, could run out of cash within a year as well as dealing with a serious food shortage. Over 95% of the country’s total trade revenue is dependant on oil. The IMF estimates that inflation in Venezuela will reach 720% this year, and a projected 2,200% in 2017. Shortages are widespread with everything from food, beer, and medical supplies to toilet paper.

Oil markets expect a production cut agreement to evolve from the Algeria meeting, which will help stabilize prices from their two-year plunge. An obstacle to essential production cuts may continue to be Iran, which has declined to entertain a production freeze until its output returns to pre-sanction levels.

Sources: OPEC, IMF, Bloomberg