Q3 Capital Markets Review - lsadvisors.com · The US Jobless Claims report is a weekly measure of...

Q3 Capital Markets Review

Q3 Capital Markets Review The third quarter of 2013 was a case study in the power of headline news. We observed fairly consistent strength in the global economic indicators that we track, as fundamental macroeconomic risk levels and volatility came down. However, positive data was drowned out by news headlines relating to the Federal Reserve in August and the federal government in September. Throughout the quarter, most global economic indicators strengthened. The S&P 500 reflected this strength, as July gains of almost 5% were the most significant since January. By August, however, the Federal Reserve’s “taper talk” had begun to manifest in the stock market, having already impacted the bond market in June. Fears of higher interest rates overrode macroeconomic strength, and the S&P 500 declined in August. By the time the Fed announced that it would not scale back its bond-buying program, equity markets had already priced in a taper. In the first half of September, the S&P 500 index hit an all-time high, as markets refocused on low macroeconomic risks and strong data. The success was relatively short-lived, however, as Congress took over news headlines from the Fed, all but drowning out fundamental economic strength. With Republicans and Democrats yet again at an impasse and the government facing shutdown, the S&P 500 quickly reversed course into decline. We feel it is important to note that despite the noise from the Federal Reserve and Capitol Hill, risk levels in our global macroeconomic data points remained low. Economic growth was strong, both domestically and internationally. We anticipate a resolution of the dispute in Washington, which would allow continued fundamental macroeconomic strength to price back in to the stock market. The following indicators are representative of the overall economic climate in the second quarter of 2013.

July:

• Much of the economic uncertainty present in June carried over into July.

However, flashes of economic growth were encouraging, and we noted the potential for a reversal into an economic growth environment. By the middle of July, flashes had crystallized into trends as growth gained traction.

• As economic conditions improved – and the S&P 500 index followed suit – we invested with a shift toward cyclical stocks, which are typically responsive to macroeconomic conditions.

Q3 Capital Markets Review July

Asian Credit Market Risk, 7/31/12 – 7/31/13

• Heading into Q3, credit risk was elevated; however, credit markets improved throughout the month of July as credit risk declined.

North American Credit Market Risk, 7/31/12 – 7/31/13

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US Consumer Confidence (Conference Board), 1/31/2008 – 6/30/13

• US consumer confidence grew steadily stronger heading into Q3. • Heading into Q3, consumer confidence was at its highest level since January 2008.

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Price of Brent Crude Oil, 7/31/12 – 7/31/13

• Global crude oil prices dropped precipitously at the end of June, only to recover almost as fast in the first two weeks of July.

• Lower oil prices indicate a potential drop in demand for energy consumption.

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US 10-Year Treasury Bond Yield Volatility, 7/31/12 – 7/31/13

• Volatility in US Treasury bond yields spiked into July, then gradually came down through the month before stabilizing at the end of July.

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S&P 500 Index, July 2013

• In the month of July, the S&P 500 index experienced strong appreciation, as gains in excess of 5% were the best since January.

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Q3 Capital Markets Review August August:

• Heading into August, we noted that risk levels had declined materially as

economic growth picked up across the board. We accordingly remained invested in cyclical stocks, which are economically sensitive.

• By the middle of August, whispers of the Federal Reserve tapering their bond-buying program had developed into loud exclamations. Ben Bernanke used the word “taper” in a speech, and markets immediately went into correction. We hedged our exposure somewhat; however, we remained mostly invested in anticipation of a Fed taper pricing into the market, and a subsequent re-focus on positive economic fundamentals.

US 10-Year Treasury Bond Yield, 8/31/12 – 8/31/13

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3• US Treasury yield continued their ascent in August, with a sharp spike mid-month.

• Traditionally,

higher US bond yields indicate increased appetite for risky stocks; in this case, however, yield spikes point to a fear of interest rates forced higher by a Fed taper.

Q3 Capital Markets Review August

ISM Manufacturing Index, 5/31/2011 – 7/31/2013

• US manufacturing conditions improved dramatically going into August, after modest improvement the previous month.

• The ISM Manufacturing Index showed the strongest conditions in over two years.

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Germany Purchasing Managers’ Index, 5/31/2011 – 7/31/2013

• Manufacturing conditions in Germany, Europe’s most significant economy, rose above 50 for only the second time in the past year.

• A reading above 50 indicates economic expansion; below 50 indicated contraction.

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ISM Manufacturing Index, 5/31/2012 – 5/31/2013

• The US housing market continued its recent growth after several flat months. • The S&P Case-Schiller Index measures US housing activity. The reading is two months

delayed; in this case, the reading released on July 31 reflected conditions on May 31.

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S&P 500 Index, August 2013

• The S&P 500 declined in the month of August, as worries over a Fed taper drowned out fundamental economic strength.

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Q3 Capital Markets Review September September:

• By September, the market had seemingly accepted the probability of a Fed

taper, perhaps even viewing it as a good thing. Economically, there was little change, as our global economic indicators continued to strengthen; nonetheless, markets reversed course and gained over 3% in the first two weeks of the month.

• When the Fed announced on 9/18 that it would not taper, market attention

quickly shifted to Washington, D.C. One headline fear supplanted another, as the possibility of an imminent government shutdown sent markets back into decline. In any case, economic data continued to strengthen, and related risk levels continued to come down through quarter-end.

North American Credit Market Volatility, 9/28/12 – 9/30/13

• Lower levels of credit risk held steady as volatility in credit markets continued to come down.

European Credit Market Volatility, 9/28/12 – 9/30/13

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Q3 Capital Markets Review September

Architectural Billing Index, 8/31/08 – 8/31/13

• US architectural activity continued to strengthen incrementally. • The Architectural Billings Index showed the third-strongest reading in the last five years. • A reading above 50 indicates expansion; below 50 indicates contraction.

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US Jobless Claims, 9/30/10 – 9/27/13

• The US jobs market continued to steadily improve as jobless claims declined.

• US jobless claims

reached their lowest level in three years.

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Price of Crude Oil, 9/28/12 – 9/30/13

• Global oil prices weakened throughout the month of September, though weakness was mostly relative to April – August strength.

• Weakening oil prices represented the bear case in our global macroeconomic analysis.

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S&P 500 Index, September 2013

• The S&P 500 index appreciated for the first half of September, and declined for the second half, as focus on a taper (which never happened, and was priced into the market anyway) gave way to fears of an possible government shutdown (which did happen).

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Global Economic Indicator Descriptions The Price of Brent Crude Oil is a benchmark that measures global crude oil prices. The North American Credit Market Risk is a measure of the cost to insure North American credit derivative instruments. The Asian Credit Market Risk is a measure of the cost to insure Asian credit derivative instruments, excluding Japan. The North American Credit Market Volatility is a measure of movement in North American credit derivative instruments. The European Credit Market Volatility is a measure of movement in European credit derivative instruments. The US 10-Year Treasury Bond Yield is the interest rate on the bond issued by the United States government that matures in 10 years. The US 10-Year Treasury Bond Yield Volatility is a measure of movement in the interest rate on the bond issued by the United States government that matures in 10 years. The Conference Board Consumer Confidence Survey is a measure of United States consumers’ outlook on economic conditions. The Architectural Billings Index is a leading economic indicator that measures nonresidential construction activity in the United States.

Global Economic Indicator Descriptions The ISM Manufacturing Index is a survey-based measure of manufacturing conditions in the United States. The US Jobless Claims report is a weekly measure of the number of claims filed for United States jobless benefits. The S&P 500 is a value-weighted index of 500 widely held common stocks, whose performance reflects changes in stock market conditions. The S&P 500 Volatility Index (VIX) is a measure of the implied volatility of S&P 500 index options, commonly used to gauge general stock market volatility.

Disclosure L&S Advisors, Inc. is a privately owned corporation headquartered in Los Angeles, CA. L&S Advisors was originally founded in 1979 and dissolved in 1996. The two founders, Sy Lippman and Ralph R. Scott, continued managing portfolios together and reformed the corporation in May 2006. The firm registered as an investment adviser with the U.S. Securities and Exchange Commission in June 2006. L&S Advisors performance results prior to the reformation of the firm were achieved by the portfolio managers at a prior entity and have been linked to the performance history of L&S Advisors. These results should not be interpreted as the actual historical performance of L&S Advisors. Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the strategies, markets, or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. All data for global economic indicators has been provided by Thompson Reuters.

Q3 Capital Markets Review - lsadvisors.com · The US Jobless Claims report is a weekly measure of...

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