Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
A Slow but Notable Week
In August, the market capitalization of equities worldwide tacked on an additional $2.2 trillion and touched on a new record of $66.0 trillion. The upswing in “value,” per se, comes at a time when economic data (sluggish as it is) has increased the speculative perception that central banks around the globe will soon intervene to support economic growth. But considering the fact that $2.2 trillion in one month is more than central banks can or are willing to “print” in an entire year (for now), bulls may have overstretched this already thinly traded rally, primarily in US stocks, to a near-term peak. That said, it’s still uncertain whether stocks will give up any momentum between now and the next FOMC meeting slated for September 17th. Time will tell, but it seems prudent for bulls to hedge their bets ahead of what looks like another Fed taper (from $25.0 billion to $15.0 billion). Even if it is just for good measure, the probability of a funding crisis (or dislocation in stocks) is rising fast since markets have been aggressively front-running Fed easing that has yet to materialize.
By the numbers, for July, US new home sales fell 2.4%, durable goods orders rose 22.6% (ex-transportation they fell 0.8%), pending home sales rose a modest 3.3%, and personal spending fell 0.1% as incomes rose 0.2%. All in all, housing is still struggling, while “orders” favor those who still have access to credit to acquire what they need (i.e., corporations/airlines), while consumers whose access to credit has been limited by higher rates have seen their spending power dwindle .
Overseas, Russian forces invaded Eastern Ukraine – now called the “new Russia.” Sanctions are expected, in addition to those already hampering growth in the eurozone. That expectation, combined with a drop in euro-area inflation (from 0.4% to 0.3% in July), prompted Mario Draghi to utter another vow for more stimulus. His promise led to an attempted rally in eurozone stocks, but regional bond markets fared much better. German, French, Spanish, and Italian bonds, to name a few, climbed to new highs, subsequently pushing rates to new lows. With rates so low in the eurozone, stimulus is abounding – so much so that German Finance Minister Wolfgang Schaeuble issued a debt crisis warning, saying liquidity in the eurozone “is not too low, it’s even too high,” and emphasizing the need for more effective “structural” reforms in place of QE.
The precious metals pushed sideways for the week, with solid support established for gold at the $1,285 level. The best thing that can be said for gold is that it refuses to gain any momentum to the downside, even as the dollar has spiked higher (in the face of euro/Ukraine issues). Gold inventories at the COMEX gained modestly for the fourth consecutive week to 9.93 million ounces. All in all, it seems that we are primed for a decent move to the upside in the metals, but a few things need to play out first before that happens – not least of which would be a recognizable topping out in the stock market.
Best Regards,
David Burgess
VP Investment Management
MWM LLLP
