The Halfway Point

Today is the last trading day for the first half of 2016, and just in time the S&P 500 index is back in positive territory for 2016, up 1.7 percent for the year. Now the question is whether the index can finish today above 2015′s closing level of 2044.  If it does, that could bode well for a second-half rally.

According to the research firm Convergex,  starting in 1958, when the S&P 500 has reached July 1 in the green, it rose in the second half 79 percent of the time. In those years, the index averaged a nearly 6 percent average return in the final six months.

On the other hand, the S&P 500 has closed out the first half in the red 20 times, and finished higher on just 10 of those occasions. In those years, the average return for the index has been 1.1 percent.

High Expectations

A recent survey by the British asset management company Schroders found that most investors have extremely unrealistic investment expectations. American investors, and millennials in particular, have the most inflated expectations of anyone in the world.

What do Americans expect to generate in annual income? A whopping 11.1 percent return. American millennials, aged 18 to 35, are nearly as optimistic, with expectations of 10.2 percent returns. Their investing peers in Europe and Asia seek 7.9 percent and 9.7 percent returns, respectively.

What can investors actually expect? The average stock market yield globally is about 4 percent. For bond investors, benchmark interest rates in major developed markets are at 0.5 percent or lower, or even negative.

GDP Inches Up

The good news is that bad news isn’t as bad as we thought. The Commerce Department this morning revised its final estimate of gross domestic product upward to 1.1 percent in the first quarter of 2016.

That final estimate is an improvement on the previous estimate, that the economy grew at a 0.8 percent pace. On the other hand, the 1.1 percent mark is still the weakest pace in the past year.

The main factors behind the upward revision: The U.S. exported more good and services than previously thought during the period. And companies spent more than initially estimated on software and research and development. But total business investment still declined compared with the prior quarter, falling at the fastest pace since the third quarter of 2009.

Brexit and the Markets

The question for the market this week is: What effect will Brexit - the British exit from the European Union -  continue to have? Friday was a bloodbath: Both the large-cap and the blue-chip U.S. indexes had their worst session since last August.

By the end of the day the S&P 500 had lost 3.6 percent of its value, and the Dow Jones Industrial Average lost 3.4 percent. The Nasdaq Composite Index fell by 4.1 percent, its worst one-day percentage drop since August 2011.

As for this week? The CBOE Market Volatility Index, which gauges the level of fear in the financial markets, skyrocketed 49 percent on Friday, notching its biggest one-day percentage gain since August of 2011. But remember, that measures expected market movement - which could be either positive or negative.

The Brexit Fallout

The big news this morning is that the U.K. has voted to leave the European Union, a move informally known as Brexit. The markets, it is safe to say, are not happy with this decision. The S&P 500 and the Dow Jones industrial average both opened trading down more than 2 percent this morning.

But that's nothing compared to the world markets. Here's a peek:

• London's benchmark FTSE 100 was down 8 percent
• The Stoxx Europe 600 was down 8 percent
• The British pound lost 11 percent of its value
• Italy's stock market was down 11 percent
• Spain's stock market was down 11 percent
• Greece's stock market was down 13 percent

Buybacks: Good for the Economy?

American companies keep buying back their stock in increasing numbers.  For the 12 months that ended in March 2016, S&P 500 companies spent a record $589.4 billion on buybacks. That’s up 9.5 percent from the same 12-month period ended in March 2015, and breaks the record set in 2007 of $589.1 billion.

Cash reserves set a new record as well, up 1.6 percent to $1.347 trillion. This is good news for shareholders, of course. Total shareholder returns – dividends plus buybacks – in the first quarter set a record (for the second consecutive quarter) of $257.6 billion.

All that is good news for shareholder and stock prices - but maybe not such a good sign for the overall economy. The latest buyback numbers suggest that business have better things to do with their money than invest in their businesses.

The Growing Upper Middle Class

In the post-recession era, there has arisen the notion that only the wealthiest of U.S. society, generally called the top 1 percent, was truly doing well. But a growing body of evidence suggests the economic expansion since the 2007-2009 financial crisis has enriched a much larger swath of the upper middle class as well.

The latest piece of evidence comes from economist Stephen Rose of the Urban Institute, who finds in new research that the upper middle class in the U.S. is larger and richer than it’s ever been. Rose defines the upper middle class as any household earning $100,000 to $350,000 for a family of three: at least double the U.S. median household income and about five times the poverty level.

Rose finds the upper middle class, under those parameters, has expanded to a new record of nearly 30 percent of American households as of 2014. That is up from about 12 percent of the population in 1979.

Why Aren't Men Working?

Even as unemployment has been falling, the size of the nation’s workforce continues to fall as well. Since the start of the recession, the percentage of the population that has a job or is looking for one has dropped more than 3 percentage points, to 62.6 percent - the lowest we've seen since the 1970s.

Surprisingly enough, workforce participation has been declining the most among men between the ages of 25 and 54, traditionally considered the prime working years. The high mark for this cohort was 98 percent labor participation in 1954, but it currently stands at 88 percent. The United States now has the third-lowest participation rate for “prime-age men” among the world’s developed countries.

The biggest issue seems to be the decline in blue-collar jobs. More than 90 percent of college-educated men are in the workforce, compared with just 83 percent of those with a high school diploma or less.

Cash Holds Are Rising

More and more fund managers are keeping their powder dry. Cash positions rose to 5.7 percent in June from 5.5 percent in May, the highest level we've seen since November 2001, according to a Bank of America Merrill Lynch survey released last week.

Cash allocations spiked after 9/11, then fell back through 2007. But even when they rose again at the time of the collapse of Bear Stearns and Lehman Brothers in September 2008, cash holdings still only reached about 5.5 percent, below their recent peak. More recently, managers have been raising their cash positions pretty steadily since 2013.

One theory is that managers are holding back until they see what happens with Brexit - the potential British exit from the European Union. That vote is slated to occur on Thursday of this week.

The Crash of the IPO Market

June is typically one of the busiest months for U.S.-listed initial public offerings, and, after a bright spot in May for new listings, many bankers and investors were cautiously optimistic that the pickup in deal activity could continue into the summer. Instead, June has been a disaster.

The IPO market had a relatively strong May, when 17 deals raised more than $3.6 billion. That was the best month for IPOs since last October, when 16 deals raised more than $5.7 billion. So far this month there have been just five IPOs that have raised a combined $392 million.

As a result, 2016 remains on pace to be the slowest year for IPOs since the financial crisis. There have been 39 new offerings so far this year, raising $7.7 billion - half of what was raised by new listings in the same period last year.

The Fed Looks Into the Future

The big news from yesterday is that the Federal Reserve decided not to hike interest rates at its just-concluded June meeting. But the Fed did indicate that it still expects to raise interest rates twice in 2016, from the current target range of 0.25 percent to 0.50 percent.

At the same time, the Fed predicts three rate hikes in both 2017 and 2018, down from four in its March forecast.  In materials released by the Fed with its interest-rate announcement today, the Fed pushed down its estimate of rates in the future to 1.6 percent in 2017 and 2.4 percent in 2018.

The disturbing side of this is the Fed's pessimism on economic growth. Their forecast now sees U.S. growth topping out at 2 percent in the long run, well below the nation’s historic 3.3 percent growth rate.

Strong May Sales - Is GDP to Follow?

Word is out that in May, retail sales in the U.S. rose for a second straight month. They were up 0.5 percent from April and 2.5 percent from a year ago. Given all the concern over the May jobs report, and its implications for the economy, the retail-sales figures were a relief.

The month-on-month number was fueled largely by a 2.1 percent rise in sales at gas stations, even though gas-station sales are still down 9.5 percent from a year ago. In the larger sense, though, the pattern these numbers are sketching out is getting very familiar.

We've seen a lot of weak winters followed by spring rebounds, highlighted by the 0.8 percent GDP number from the first quarter. That's the third straight weak first quarter we've seen, but GDP in the second quarter of 2015 was 3.9 percent, and in 2014 it was 4.6 percent. Based on those retail numbers, we could be in for a similar pattern in 2016.

Consumer Sentiment Humming Along

Last week’s University of Michigan Consumer Sentiment index showed that people are still feeling pretty good about the economy. It came in at 94.3, just a tick below the 94.7 we saw in May. The confidence index has been in a range similar to that of the last expansion’s peak for about two years now.

Despite worries over job creation and rising gas prices, the current conditions index was especially strong, shooting to a new post-recession high. The current conditions index is now higher than 90 percent of the prior readings for this survey dating back to 1978.

Maybe that's because expectations for inflation over the five years starting five years from today fell to their lowest level on record, at 2.3 percent.  That’s a continuation of a slide that’s been in place since 2014.

Good Times for Job Hunters

Despite the recent hiccup in the employment numbers, 43 percent of Americans still say this is a good time to find a quality job, according to a new Gallup survey. That puts the current figure on the high end of Gallup's trend since 2001.

The percentage saying it is a good time to find a quality job has ranged from a low of 8 percent in 2009 and 2011 to a high of 48 percent in January 2007. Americans' perceptions of the U.S. job market bottomed out after the Great Recession but steadily rebounded from 2012 to 2014, reaching a recent high of 45 percent in January 2015.

Since then, the percentage saying now is a good time to find a quality job has hovered around 40 percent. This is another area where we back to normal after the recession, since these figures are similar to levels seen in 2006 and 2007.

Americans Aren't Paying Their Bill

Here's an unexpected trend: Americans are paying off less of their credit card bills. Over the first quarter of 2016, consumers only paid $26.8 billion in credit card debt. That's the smallest first-quarter debt reduction since 2008 and is nearly 25 percent below the post-recession average, , according to a study by credit card search and comparison website, CardHub.

During the first quarter of 2016, the average indebted household’s balance was $7,597, which is down from $8,431 at the end of 2008. That's skewed by a few heavy borrowers, though; the median household credit-card debt is just $2,300.

If things continue at this rate, U.S. households will accumulate $1 trillion in outstanding debt by the end of 2016. That would be the most debt we've ever held, according to Card Hub.

Rebounding Oil

U.S. crude oil settled at its highest level since July on Tuesday, and topped $51 a barrel yesterday afternoon. That's high in recent terms - but remember, its record high was $145 a barrel in July 2008.

On the other hand, it’s a far cry from February 11, when U.S. crude settled at a low of $26.21 a barrel. It remains to be seen how the price rise will play out at the gas pump, but it's obvious that one winner has been energy stocks. Energy shares have risen 4 percent this week alone, outpacing gains in every other sector of the S&P 500 index.

Shares of energy companies have climbed more than 14 percent since the beginning of the year, For a short while this week, they even passed utilities for a short time to briefly be the best-performing S&P 500 sector of 2016. 

Global Wealth Sags a Bit

For the first time since 2011, the growth of private wealth last year slowed around the world, according to a report published yesterday by the Boston Consulting Group. Total private global wealth rose 5.2 percent in 2015, to reach a total of $168 trillion.  The lowest growth on record was in 2011, when private wealth expanded only 3 percent globally.

The United States and Canada’s wealth grew only 2 percent last year, the least of any region, to a total of $60 trillion. Japan, which was up 4 percent, was the only area to grow more than it had the previous year.

The report cited a decline in global GDP output and poor market performance as factors in the sluggish performance in all regions around the world. Despite the U.S. and Canada’s meager growth, the U.S. still has the most millionaire households in the world, with more than 8 million. In second place is China with over 2 million.

Stocks Not Fazed by Jobs Report

After the worst jobs report in six years, some were concerned about how the market would react, but we got a positive answer yesterday, with another 0.5 percent increase in the S&P 500 index. Since May 19, the S&P has risen by 3.4 percent. The index  is now only 1 percent away from its all-time high, set in May 2015.

The biggest winner yesterday was a sector that has been beaten down recently. Energy stocks led the S&P 500's rise, gaining 2 percent. One big reasons was that the price of crude oil rose to its highest level since July 2015.

Another sector that had fallen on hard times, the materials sector, was also up strongly yesterday. The key factor there: The price of gold has risen by nearly 3 percent since Friday.

Unseasonal Adjustments

The first quarter GDP number has been revised upward, but it's still only at 0.8 percent growth. While that's down sharply from the 2.4 percent pace of the last two years, some economists say it reflects something else. They claim the government's method of seasonally adjusting its estimates manages to underestimate first-quarter growth every year.

In fact, in six of the past ten years, the first quarter has been reported as the slowest-growing quarter of the year. Over the course of that decade, first quarter GDP growth has averaged a drop of 0.3 percent, while the second quarter has averaged growth of 2.4 percent.

If the economists are right about the current quarter, this means second-quarter growth should be 3 percent or better, as the other side of the error in seasonal adjustment reveals itself. The result will average out to an annual rate around 2 percent, and the economy will be back into its 2 percent to 2.5 percent range for the year,

A Weak May Jobs Report

May's unemployment report is out this morning, and it's the worst we've seen in a long time. The economy added just 38,000 jobs for the month, which is the smallest monthly figure since September 2010. In the 12 months prior to May, employment growth had averaged 219,000 per month.

The good news is that the headline unemployment rate fell to 4.7 percent in May, the lowest that number has been since November 2007. But the decrease in the jobless rate was due in part to a people dropping out of the labor force.

Part of the problem is the Verizon strike, which has reduced the number of people listed as employed by 35,000. But even adding those workers back into the workforce would still make this a disappointing month.

What Makes the Wealthy?

A new study released this week by U.S. Trust shows that high-net-worth Americans get that way not so much because of inheritance but because of hard work. Researchers surveyed 684 individuals with at least $3 million in investable assets, 30 percent of them with $10 million or more.

The survey found that a surprising 77 percent of the respondents grew up in middle- or lower-class circumstances. Of that group, 19 percent grew up poor.

Family values and upbringing — focused on academic achievement, financial discipline, work participation, family loyalty and civic duty — were crucial to their success. Eight in 10 of the respondents described their parents as firm disciplinarians who also encouraged their individual interests and talents, and two-thirds said their parents tolerated their mistakes and failures. Sixty-five percent said their family had a strong tradition of philanthropy and giving back to society.

Stronger Spending

U.S. consumer spending recorded its biggest increase in more than six years in April. The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 1.0 percent last month. Consumption had climbed 0.2 percent in February and was flat in March.

Last month's increase was the largest since August 2009. The biggest-growing type of purchase:  automobiles. Personal income, including earnings from wages and other sources, rose 0.4 percent in April.

While these are good signs for the economy, they may also be a sign of increasing inflation. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.2 percent after edging up 0.1 percent in March. That left the increase in the year-on-year core PCE rate at 1.6 percent.