What We're Reading

A December Fed rate hike, uncertainty regarding the U.S. presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities.  Comments in italics are mine.

The summer rally has left equity valuations looking stretched. The median U.S. stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27, but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.

Lackluster earnings growth remains another concern. S&P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major culprit, and this headwind should wane if oil prices edge higher over the next 12 months, as we expect. Nevertheless, faster wage growth and a f

Next week will be a historical one for both the United Kingdom and the global economy. On June 23^rd the British people will decide whether to leave or stay in the European Union. Polls have been mixed over the last couple months, but the latest out show momentum for leaving, which is scaring the markets.

Loss of British sovereignty is the fundamental reason for leaving the EU, as many supporters want to take back control of U.K. borders in order to curb immigration. Those that wish to stay in the EU say there are severe short-term economic consequences that would make trade difficult and slow the economy. Even President Obama recently said that if there is a Brexit, the U.K. would go to the “back of the queue” in American trade deals.

While debate and speculation is running rampant, markets are watching the British Pound closely. Last week U.S. indices tracked and moved with the Pound tick for tick, showing that traders are very concerned about the upcoming vote.

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