Navigating Volatility
At the risk of sounding like a broken record, the market has continued to trade in a historically narrow range over the past month just as it has throughout most of 2015. Outside of a half dozen momentum names like Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX), equities have struggled to produce any gains in 2015.
China continues to be my number one watch item for the domestic market currently. Three and four percent daily swings on those indices have become a frequent occurrence as Chinese authorities decide whether they are committed to a free market and to what extent. Commodities and energy continue to get crushed on worries about China, oversupply and the strong US dollar.
The strong US dollar has also impacted earnings and revenue growth in the first half of the year, or lack thereof of either. In the first half of 2015, there has been no year-over-year profit or revenue growth from the S&P 500. Factset believes this trend will continue into the third quarter. Given this, I am surprised the market has held up as well as it has. I am also concerned about the narrowing breadth of the stock market which is usually a sign of a top.
Another big worry that does not get mentioned enough is how sovereign debt ratings are degrading across the globe. Whether it is Greece or Ukraine in Europe, Puerto Rico or Chicago closer to home, or South America’s largest economy Brazil, ratings and the potential for insolvency and/or debt “haircuts” seem to be increasing at a rapid rate. How these individual sovereign debt issues get resolved over the next few years is going to be very interesting to say the least.
Ending on some brighter notes, the housing market definitely seems to be accelerating; this is good news for the domestic economy and job growth. Existing home sales and housing starts are at their highest levels since before the financial crisis. Homebuilder confidence is also at 10 year highs. This development is starting to show up in improved results in the earnings reports of homebuilders and it bodes well for the housing plays in the Small Cap Gems portfolio. We’ll cover more about them in the Portfolio Update section of this month’s newsletter.
Although I still believe the highflying biotech sector is overdue for some sort of pull back our small cap selections within this space continue to perform well and are delivering the most outsized returns among our positions.
I expect we will have to navigate increased volatility in the months ahead but hope to continue to deliver value and performance while we get more clarity around the direction of the market.
Lastly, should you ever have a question or comment you can reach me at [email protected].
So let’s get started with this month’s issue. Click here for your copy.
Bret Jensen
Editor
Bret Jensen’s Small Cap Gems