Market dynamics and the US economy

 
The performance of key US companies in Stanley Black & Decker, Honeywell, Whirlpool, General Electric and American Airlines topped consensus forecasts and turned in a strong performance. While there were some disappointing figures reported by Sketchers, Starbucks and Chipotle, the gains in the Dow were a welcome return to form for the premier US index.
The DJIA has turned in some strong performances in 2016, and is up 4.03% over the course of a year. The 52-week trading range is 15,370.33 on the low end and 18,622.01 on the high end. For the year-to-date, the Dow Jones has gained 6.58%, over the past three months it is up 3.30%, over the past month it is up 3.11% and over the past five trading days it is up 0.34%. The Dow remains one of the top performing indices in the US for the year-to-date, with the NASDAQ gaining just 1.85% in 2016 and the S&P 500 gaining 6.41%.
Some of the biggest components of the Dow Jones Industrial Average include the following:
• Apple Inc at $98.64 per share, down 19.65% year-to-date;
• Microsoft Corp. at $56.56, up 24.72%;
• Exxon Mobil at $93.99, up 22.7%;
• Johnson & Johnson at $125.01, up 27.2%;
• GE at $32.05, up 23.51%;
• Walmart at $73.53, up 5.22%;
• JP Morgan Chase & Co. at $64.03, down 2.39%;
• Procter & Gamble at $85.70, up 6.95%;
• Verizon at $56.08, up 22.13%;
• Pfizer at $36.72, up 7.75%.
These top ten companies have a market capitalisation worth over $3 trln, and their relatively bullish performance in 2016 has helped to keep the DJIA well in the black.

Prospects for the Coming Week
The recently held Republican National Convention resulted in Donald Trump being nominated as the party’s front-runner for the November general elections. The controversy around the Trump movement remains alive and well, following the recent admission by the speechwriter that the speech by Melania Trump contained extracts from the one by Michelle Obama back in 2008. Nonetheless, attention will be shifting to Hillary Clinton’s inauguration as the Democratic party’s front-runner. The DNC (Democratic National Convention) will be taking place on Thursday, July 28. Hillary Clinton has already announced her running mate, as has Donald Trump and the battle lines have officially been drawn.

Fed Rate Decisions in the Pipeline
Several key developments are in the pipeline vis-a-vis the upcoming Federal Reserve Bank meeting. It is largely expected that policymakers will leave interest rates unchanged when next they meet. The FOMC (Federal Open Market Committee) will likely change the tone and/or wording in its statement about how the US economy is improving. Recall that June data for non-farm payrolls came in substantially higher than expectations at 287,000 new jobs. The consensus forecast was 175,000. According to FedWatch CME for Wednesday, July 27 there is a 96.4% likelihood of interest rates remaining at the current level of 25 to 50 basis points. There is a 3.6% chance of interest rates rising to 50-75 basis points.
If we extrapolate to September 21, there is an 84.9% likelihood of interest rates remaining at the current level (25 to 50 basis points) and a 14.7% likelihood of interest-rates rising (50 to 75 basis points), and a 0.4% likelihood of interest rates rising higher (75 to 100 basis points). Moving on to November 2, the likelihood of interest rates remaining at the current level (25 to 50 basis points) is at 83.1% and the likelihood of interest rates rising (50-75 basis points) is 16.2%. The final interest-rate possibility for 2016 is December 14. Analysts project that there is a 55.4% likelihood of interest rates remaining at the current level and a 38.5% likelihood of interest rates rising by 25 basis points. Analysts expecting interest rates to rise up to 50 basis points (75 – 100 basis points) place that number at a 5.9% likelihood. Bank of America economist Ethan Harris does not believe that the Fed will do anything to change these probability numbers. The elephant in the room remains the Brexit, and until such time as an arrangement has not been hammered out between the UK and the EU, it will continue to be a major source of concern.

Performance of Major US Companies
There are other major economic data releases slated for this week, notably US GDP. The US economy has shown strong growth trends and analysts expect a bullish performance for Q2. The first three months of 2016 were lacklustre with just 1.1% in GDP growth. But the big news is invariably with earnings reports. Some 200 listed companies on the S&P 500 will be posting details of their earnings, and some of the big-name companies to announce their revenue streams and EPS include Alphabet, Twitter, Apple and Amazon.com. Already, we have received preliminary data from major companies on the DJIA.
Further afield, the Bank of Japan is going to be announcing central bank policy this week. It is largely expected that some sort of stimulus measures will be adopted given that the Prime Minister’s ruling party has now won a supermajority in the upper house and fiscal policy initiatives will easily pass. Governor Kuroda ruled out the likelihood of helicopter money being issued to finance the budget deficit. But the sentiments of the Japanese central bank and finance ministry have proven unpredictable, especially since Japan opted for negative interest rates recently.

What is Happening with Gold?
In order to understand how gold price movements take place, it is important to evaluate the state of the markets. Gold prices fall when interest rates rise, when equities markets prosper, or when geopolitical uncertainty is at a minimum. The reason for this negative correlation is that gold is a safe-haven asset which investors flock to during times of volatility. It is not an interest-bearing asset like a CD or a government treasury bond, but it appreciates when equities markets are floundering. Gold and government bonds are the primary safe-haven assets for investors. Over the past year, the gold price has outperformed most other commodity prices.
But caution is the order of the day as the volatility in markets appears to be subsiding somewhat. This is evident in the calming of nerves vis-a-vis the Brexit crisis. The UK moved swiftly to appoint a new Prime Minister in Theresa May, and the fallout from the Brexit was rather limited on the UK economy and the EU. We have seen the pound plunging to a 31-year low (closing in on its 1985 values), but a recovery has been staged. Recall that gold was surging towards $1,400 per ounce at the height of the Brexit volatility, but the price of the precious metal has come down substantially since then. Gold is currently trading at $1,323.40 an ounce on the Comex, down 0.57% or $7.60. The spot gold price is $1,322.73 per ounce, down 0.65% or $8.70.
The problem for gold is that the US economy is not biting at global market jitters. Wall Street has remained resilient to everything that has been thrown at it, including the Chinese stock market crashes on January 3 and January 5, 2016 when the Shenzhen Composite Index and the Shanghai Composite index sold off in huge quantities. This was evident once again when global equities weakness failed to substantially dent the performance of Wall Street indices. The Brexit saga is a clear example of the resilience of the US economy. It is clear that we are seeing stabilisation taking place in the US, with strong non-farm payrolls jobs growth, increased consumer sentiment, strong purchasing managers index data and positive GDP growth level. US economic surprises are at a multi-year high and this bodes well for a risk-on approach, and not for gold.
Consider, for example, that since 2015, the S&P 500 has gained 10% and the Dow Jones 30 has gained 8%. Investors appear to be overly cautious with respect to the resilience of the US economy, and a move to gold has ensued. While safe-haven assets are a prerequisite for managing market volatility in a financial portfolio, there is the risk that high yield equities may be foregone. Gold is trading at 2-year highs, and it may be time to start reinvesting in technology stocks, discretionary consumer stocks and energy stocks. Long-term, these sectors will likely bode well for a balanced financial portfolio. Emerging markets are enjoying a bull run and lots of breathing room with the Fed’s decision not to hike interest rates. This also bodes well for equities growth, commodities growth and global stability.