Panama Gets Headlines but Fails to Move the Markets

April
11

Written by: Jon McGraw

We all learned a thing or two about Panama last week.

The country is not the home of the Panama hat, which is made in Ecuador. However, it is the only place in the world where you can watch the sun rise on the Pacific Ocean and set on the Atlantic Ocean.

It’s also home to a lot of offshore companies, according to the millions of records leaked from the world’s fourth largest offshore law firm. The Guardian reported that 12 national leaders were among 143 politicians, athletes and wealthy individuals (including family members and associates) who were participating in offshore tax havens.

It’s not illegal to hold money in an offshore company, unless the company facilitates tax evasion or money laundering. Further investigation will be required to know whether that was the case. CNBC suggested financial markets could be affected if the findings lead to greater regulation of foreign banks or prosecutorial action against them.

While the Panama scandal captured a lot of attention, it didn’t have much of an impact on markets. News that the U.S. Treasury was cracking down on corporate inversions (or mergers that give U.S. companies a foreign address and lower their tax rates), along with indications the U.S. Federal Reserve may raise rates twice during 2016, caused stocks to dip late in the week. Some major U.S. indexes finished the week lower.

We may be in for another round of market volatility. Corporate earnings season is here. That’s the period when publicly traded companies report how well they performed during the previous quarter. CNBC said, “Over the past 10 years, the emergence of first-quarter earnings reports has generally corresponded with a rise in volatility.”

Data as of 4/8/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -1.2% 0.2% -1.7% 9.4% 9.0% 4.7%
Dow Jones Global ex-U.S. 0.3 -2.5 -14.2 -1.5 -2.5 -0.7
10-year Treasury Note (Yield Only) 1.7 NA 1.9 1.7 3.6 5.0
Gold (per ounce) 2.1 16.7 2.7 -7.7 -3.4 7.6
Bloomberg Commodity Index 1.4 0.6 -20.4 -16.2 -14.6 -7.3
DJ Equity All REIT Total Return Index -0.4 5.7 4.3 8.7 11.9 7.0

Guessing at the Future

As Carly Simon used to sing, “We can never know about the days to come.” However, that doesn’t stop anyone from making educated guesses about the future of companies, financial markets and economies. As we enter the second quarter, investment and business professionals have been offering their insights:

  • McKinsey & Company’s March Economic Conditions Snapshot indicated 80 percent of surveyed executives “expect demand for their companies’ products and services will grow or stay the same in the coming months, and a majority believe (as they have in every survey since 2011) their companies’ profits will increase.” However, they are not as optimistic about the global economy as they were in December. About one-half of executives in developed and emerging markets said economic conditions globally are worse than they were six months ago.
  • The Wall Street Journal’s April 2016 Economic Forecasting Survey, which queries 60 economists, reported that three of four survey participants expect a Fed rate hike in June. Few expect a recession during the next 12 months, putting the odds at 19 percent. Almost one-half stated global risks were the greatest threat to the U.S. economy, followed by financial conditions, a slowdown in consumer spending, falling corporate profits, and U.S. politics.
  • PIMCO’s Cyclical Outlook predicts China’s growth in gross domestic product (GDP) may be in the 5.5 to 6.5 percent range. The target is 6.5 percent. In addition, a gradual devaluation of the yuan is possible, although China’s currency policy often produces unexpected twists and turns.
  • BlackRock Investment Institute’s second-quarter outlook centered on three themes. First, returns are likely to remain muted in the future. Second, monetary policies appear to be less divergent, which could be a positive for some markets. Third, volatility may persist as the Federal Reserve normalizes monetary policy. Diversity and careful asset selection are likely to be critical in this environment.

While it’s interesting to read experts’ predictions and expectations for coming months and years, it’s important to remember that forecasts are not always accurate. An organization that tracked forecasting results through 2012 found that forecasts were correct about 47 percent of the time.

Weekly Fun—Think About It

“Do the right thing. It will gratify some people and astonish the rest.”

—Mark Twain, American author