Download May 6, 2016

In the markets:
Stocks recorded their 2nd week of losses, although a rally on Friday limited the declines. The tech-heavy
NASDAQ trailed the large-cap indexes and the small cap Russell 2000 was also relatively weak. For the
week, the Dow Jones Industrial Average gave up just 33 points (-0.19%), closing at 17740. The NASDAQ
Composite declined -0.82% to end the week at 4,736. LargeCaps showed relative strength over their
smaller brethren as the S&P 500 large cap index declined -0.4%, while the S&P 400 MidCap index fell 0.61%, and the SmallCap Russell 2000 tumbled -1.43%. Utilities, traditionally a “defensive” sector, rose
for the week as the Dow Jones Utilities Average gained +0.74%, and Transports fell -1.69% mirroring the
weakness in the energy sector.
In international markets, Canada’s TSX fell -1.79% as a stronger Canadian dollar weighed on the market.
Markets were down across the board in Europe as the United Kingdom’s FTSE fell -1.86%, Germany’s
DAX declined -1.68%, and France’s CAC 40 dropped -2.88%. In Asia, China was the leader by limiting its
fall to only -0.85% on the Shanghai Composite Index while Japan’s Nikkei fell -3.36% and Hong Kong’s
Hang Seng plunged -4.54%.
In commodities, the industrial metal copper plunged -5.7%, reversing the gains of the last two weeks.
Precious metals took a break from their recent rallies as Gold fell -$5.20 to $1,289.70 an ounce and
Silver fell -2.15% to $17.50 an ounce. Oil also retreated -3.1% or -$1.43 to $44.56 for a barrel of West
Texas Intermediate crude oil.
In U.S. economic news, the U.S. economy added a weaker-than-expected 160,000 jobs in April as the
unemployment rate held steady at 5% according to the Labor Department. It was the smallest gain
since last September. However, a positive detail in the report is that hiring in high-paying sector appears
to have broadened out, helping to raise average hourly earnings by +0.3% on the month and +2.5% from
a year earlier. In a separate report from payroll processor ADP, private sector employers added 156,000
jobs last month, down from 200,000 in March - the smallest ADP gain in 2 years. Both the Labor
Department’s and ADP’s reports missed analyst expectations widely.
After the weakest stretch of economic growth in 3 years, an increase in income and employment tax
receipts to the fastest rate in 6 months is a positive sign. Over the past month, federal income and
employment taxes withheld from paychecks rose +4.5% from a year ago, according to the Treasury
Department. This is the best year-over-year growth in tax receipts since early November, and more than
double the rates from February and March.
In U.S. manufacturing, ISM’s manufacturing index declined a point to 50.8 last month, weakening but
still in the expansion (>50) area. Economists had predicted a lesser decline to 51.5 amid less-than-stellar
reports on regional manufacturing activity last month. The number largely reflected excess inventories
which may weigh on future production. On a positive note for manufacturing, the U.S. dollar has
continued to lose ground versus other currencies. That will make U.S. exports cheaper in foreign
markets. New orders remained the strongest point of the data at 55.8, a decline of 2.5 points from
March.
Construction spending rose +0.3% in March according to the Commerce Department. Private
construction rose +1.1% from February and +8.5% from a year ago. New single-family home
construction came in flat, but multi-family construction jumped +5.6%, up over 34% from this time last
year.
In Canada, the Canadian dollar’s relative strength over other developed nations’ currencies appears to
have come to an end after the Loonie suffered its steepest 2-day slide in 15 months. The country’s trade
deficit widened to a record in March, sparking concern over the economy’s rebound. Weakness in the
early part of the week pared the currency’s gain to +7.6% this year, dropping it to the 3rd best performer
among G10 countries after the Japanese yen and Norwegian krone.
The Eurozone’s April Purchasing Managers’ Index (PMI) reading on manufacturing came in at 51.7, up
+0.1 point from March. The services sector was unchanged at 53.1, according to Markit. For the major
economies, Germany was at 51.8 on manufacturing, but services slumped to an 11-month low of 53.6.
France was at a new 12-month low of 48, and at 50.2 in services. Retail sales for March fell -0.5% over
February, up +2.1% year-over-year.
In the United Kingdom, there were fears of stalling economic growth as Britain’s vast services sector
slowed down. Analysts say the services sector was hit by the slump in global trade and the nervousness
ahead of the June referendum on whether to stay in or leave the European Union. A carefully watched
survey of the UK’s largest sector businesses showed activity slumped in April to its slowest rate in over
three years.
In Germany, President of the European Central Bank Mario Draghi fired back at German critics of the
ECB’s easy-money policies. ECB officials stated that Germany itself is partly to blame for the ultralow
interest rates that are harming savers and pensioners. In a speech last week Draghi stated that low
interest rates were a symptom of an underlying economic problem—the compression of investment
returns globally due to an excess of savings. Mr. Draghi said, “Our largest economy, Germany, has had a
surplus above 5% of GDP for almost a decade.”
In China, recent research suggests the economic future of China may not be as bright as hoped because
of the nation’s aging population and its low fertility rates. HSBC global economist James Pomeroy notes
that China’s older citizens will stall economic growth and add strain to government spending. The
country’s median age is projected to be over 40 in eight years and that it will be another 10+ years
before China becomes a rich nation again, Pomeroy writes.
Japanese Prime Minister Shinzo Abe stated he was ready to respond to excessive currency moves if
needed, adding that he may raise the issue of foreign exchange volatility at a meeting of G7 leaders in
Japan later this month. With the yen strengthening about 12% this year versus the dollar, Abe told
reporters in London that “the exchange rate must be stabilized” and that Japan would “carefully watch
these movements and as necessary we would need to respond.” Japanese exporters suffer the most
from a rising currency, a bad situation for an export-oriented society.
Finally, late 2011 was the dawn of the “Robo-Advisor” age. Robo-Advisors were going to quickly take
over from flesh-and-blood human advisors, especially for millennial clients who are supposedly more
comfortable with a smartphone app than with a face-to-face advisor relationship. Wealthfront and
Betterment were the premier players, both heavily funded by venture-capital investments.
But a funny thing happened on the way to that destination: the Robo-Advisors have begun to falter,
fresh venture capital money has become scarce, and their growth rates have far undershot their grand
plans.
New similar offerings from Schwab and Vanguard have put further pressures on the Robo-Advisors, to
the point where the total lifetime revenue potential of new clients is less than the estimated cost of
new-client acquisition – an obviously unsustainable situation.
Early on, the growth prospects looked good. After about 2 years both Wealthfront and Betterment had
over $500 million in assets under management and within 5 years of inception each had exceeded $2
billion. But the latest data suggests that Robo-Advisor growth rates are falling rapidly, to just 1/3rd of
their levels of only a year ago, as the chart below illustrates. No doubt Robo-Advisors are here to stay,
but their predicted quick dominance over human advisors seems to have been wishful thinking.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)