Chris Versace and Bob Lang are co-portfolio managers of Trifecta Stocks, a model portfolio of elite stocks that pass rigorous quantitative, fundamental and technical tests to qualify for ownership. The following is a free preview of their weekly commentary on markets and portfolio strategies.
So much for the Brexit "leave" vote sending equities into a months-long tailspin. Last week the market more than recovered from the sell-off of June 24 and 27 to close the June quarter up 1.9%.
We agree with those observers who saw the market response to the Brexit vote as overdone. However, we also saw the big bounce-back in stocks as overdone in light of lingering economic and earnings uncertainties ahead.
Last Friday both the June ISM Manufacturing Report and the final June PMI report from Markit Economics painted a favorable picture of the U.S. economy compared to that of China and Japan, both of which continued to contract last month according to data from Markit Economics. Chinese manufacturers reported the sharpest deterioration in operating conditions in recent months in June, while in Japan production contracted for the fourth consecutive month. While we are encouraged by the improving data for the domestic manufacturing economy, we find the government's May personal income and spending report and the overall lackluster tone in June for global manufacturing (the J.P. Morgan Global Manufacturing PMI reading came in at 50.4, modestly ahead of May's 50.0 reading) to be far more sobering.
The rebound in gasoline prices has started to take its toll on consumer spending, with restaurants starting to feel the brunt of it. We continue to see consumers being more selective, as evidenced in the last several retail sales reports, and we suspect businesses will hold off with capital spending plans until the outcome of the 2016 presidential election is known. These are more reasons to think we will not see a robust pickup in the overall domestic economy in the coming months.
Despite the market's rebound there are still a number of unanswered questions following the Brexit "leave" vote. Combined with the current wackiness of the presidential election and renewed strength in the U.S. dollar not just because of Brexit but also due to comments by the European Central Bank and the Bank of England suggesting more monetary stimulus is in the cards, we are bound to see conservative guidance relative to expectations in the June quarter earnings season.
This week will be a short week owing to the Monday holiday. With June quarter earnings not expected to kick into high gear until June 11 when Alcoa (AA) reports its results, odds are this week will be more on the quiet side, with lower-than-usual trading volumes as investors bask in the sun. We'll still get some earnings reports this week, and one company we will be watching closely will be Greenbrier Companies (GBX) as gauge for transportation equipment and the domestic economy.
On the economic calendar, the two key reports to watch will be the ISM Service reading for June and the June employment report. The June ISM Manufacturing Report showed a pickup in employment, and we expect a clearer overall jobs picture after the June ISM Services report, but the devil still will be in the details given normal seasonal hiring in June. The mix of full- and part-time jobs will continue to tell the story of wage growth and what's ahead for consumer spending, as will the trend in labor force participation.