THE FED, GOLD, SECOND QUARTER GDP AND CONCENTRATION OF WEALTH

Led by the mega sized technologies, equities stumbled again Friday on concern over escalating trade tensions and worries the recovery has stalled.  Gold is over $1,900 for the first time since 2011 edging closer to an all-time high of $1,921 reached in September of that year, the result of Fed policy and trade tensions.  Gold has advanced for seven consecutive weeks, the longest stretch since 2011 and silver had its biggest weekly advance in four decades.

The FOMC is meeting Tuesday and Wednesday and some believe since the central bank has vowed to keep interest rates at zero for the foreseeable future, gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold and the gold price could increase as uncertainty in the markets rises.

Speaking of the Fed, every Fed meeting can be of significance.  Will the Fed comment about gold?  What about housing, a segment that is gaining momentum in the secondary and tertiary markets, perhaps at the expense of the mega sized markets of NYC, San Francisco, San Diego and Seattle?

As noted many times housing prices outside the mega markets are still not yet back to 2004-05 levels.  Most people gauge their net worth by the value of their homes and typically residential real estate is the primary path into the middle class.  Traditionally a strong housing market correlates to a robust economy.  Residential housing is also a hedge against and performs well in an inflationary environment.

Speaking of the economy, initial estimates of second quarter GDP is released Thursday.  At this juncture economic activity is expected to have declined by a record 35% annual rate.  Wow!  I must write this is yesterday’s statistics but the magnitude of the decline could shock some participants, especially on rising fears of again falling into the abyss if government again shutters the economy.  Personal consumption is also expected to decline by 35.0%.

What will happen this week?  Will the unwinding of the mega sized technology shares continue?  As noted several times, amount of monies in a handful of companies is at record proportions.

Goldman Sachs writes Apple, Facebook, Amazon, Google and Microsoft makes up 26% of the S& P 500, the largest representation ever recorded by the five biggest members since at least 1980.  If these stocks stumble, so does the S & P 500.  Conversely because of the unrelentless surge of these names is why indexing has vastly outperformed every other investment strategy.

Goldman writes these five companies have surged an average of 29% this year.  The S & P is down about 1%.  Without these names the S & P 500 would down over 10%.

Goldman further writes if the five largest companies declined by 10%, in order to keep the market trading flat from current levels the bottom 100 S & P 500 stocks would have to rise by a collective 90%, concluding “the record market concentrations represents great risk too aggregate index performance.”

Last night the foreign markets were mixed.  London was down 0.23%, Paris down0.28%  and Frankfurt up 0.19%.  China was up 0.26%, Japan down 0.16%  and Hang Sang down 0.41%.

The Dow should open nominally higher on a week filled with potential market moving events.  Gold pierced a record and the dollar fell to a 18 month low.   The 10-year is up 3/32 to yield 0.58%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.