Macro Commentary

There’s more action in the market than meets the eye.  As of yesterday, the S&P 500 is only down 1% on the week and only a bit over 2% from its most recent peak in May 2015.  After a quick surge up in February, the S&P 500 has traded in a 5% range from top to bottom (2130 peak in May versus a 2040 bottom in March) which it has traveled a few times in the past 7 months.  But when you look underneath, there are pockets that are more distressed.  Energy has clearly taken most of the attention, and this past week was no exception.  One of the bellwether names held by many investors (including most active managers), Plains All American, fell 11% in a single day after the management team implied on their conference call that distribution growth in 2016 may not match the 8% growth they had seen this year to be sure that their coverage ratio was appropriate (a major pipeline of theirs in California ruptured in May and has been offline).  The news impacted the whole sector as the index fell 5% on the day.  This brought the MLP index drawdown to almost 9% for the week through Thursday, much more than the direct energy equity investments such as the S&P 500 Energy sector (-1.6%) or even the smaller capitalization exploration and production specific companies (as proxied by the index fund XOP which was flat).

But energy is not the only place that big stock movements were seen this week.  Media stocks for example.  Having suffered disappointing viewer ratings and falling advertising revenue, many of the stocks declined.  For example, Disney fell 9.5% for the week and Comcast fell almost 6% with most of the drops occurring on one day.  But Viacom suffered the most.  With a viewer demographic that is most at risk to new distribution outlets available on smartphones (teenagers and young adults) combined with a major star exiting the network, Viacom’s stock fell 22% this week.

So while the US equity market remains range bound, broader sentiment remains fragile as investors look at their portfolios to see a mixed bag of outcomes so far this year.  The AAII survey of “bulls % less bears %” reached -20 (the most negative sentiment since April 2013 and short interest in the S&P 500 index fund (SPY) has increased 58% year to date.  In fact, about 34% of the market value of the SPY is now sold short in the market.  In the past, this level of negative sentiment has typically been a contrarian indicator with markets performing well much of the time in the following six to twelve months.  As long as the negative sentiment does not creep into the real economy and disrupt growth, history may repeat itself.          

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