Stock market volatility has increased over the past month, mostly because of the Greek debt crisis and China’s stock market crash. Despite the recent volatility, Fundstrat Global Strategist Tom Lee feels U.S. equities have more upside in the second half of the year. In his view, valuation is now more attractive for U.S. equities and investors who are nervous about China and Europe may look to rotate more assets to U.S. equities. Additionally, he believes the negative impact on stocks from falling crude prices will reverse in the second half because consumers and companies will finally benefit from lower energy costs.
As China’s Shanghai Exchange continues to plummet, further highlighted by yesterday’s (7/27/2015) 8.48% one-day decline, the question at hand is how will this impact U.S. equities? Ryan Detrick, the author of the linked article, examined how the S&P 500 has historically acted over the past 20 years on days when the Shanghai Exchange fell more than 8%. Interestingly, on those prior eight occasions, the S&P 500 has only averaged a 0.32% one-day decline. Detrick believes that Chinese equities could fall an additional 20%, however he feels that U.S. equities would not be significantly negatively impacted and could actually see a positive reaction from investors seeking stability.
Recent economic data has remained mixed enough to keep investors uncertain as to the Fed’s likely timeline for upcoming rate hikes. Consensus expectations are still for the first rate hike to come late this year or early in 2016. However, this article examines evidence that the Fed may have enough confidence in its inflation outlook by the September meeting to announce its first rate hike since 2006.
Today’s report from Case Shiller showed that the pace of home price appreciation is moderating, as its 20-city index rose 4.9% in the year-over-year period ending in May. This reading was less than the 5.6% consensus expectation and was down slightly from the 5% gain in April. The S&P/Case-Shiller index is based on a three-month average, which means the May figure was also influenced by transactions in April and March. On a month-over-month basis, property values fell 0.2%, the largest monthly drop since July 2014. Recent housing data has been mixed as sales of existing homes in June jumped to their highest annualized rate since February 2007, while sales of new homes fell to their slowest pace since November.
As corporate profit margins have started to recede from very high levels and revenue growth has continued to be sluggish, stock buybacks are now having a very significant impact on earnings per share for many companies. The era of low interest rates has also aided the buyback activity as some firms have used debt to finance the repurchase of equity. During periods when stocks generally trade at low valuations, stock buybacks have the potential to enhance shareholder returns. However, with broad equity market valuations now above historical norms and buybacks running at record levels it is not clear that the current buyback activity will be unsustainable or create long-term shareholder value.
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