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Weekly Review - April 13, 2015

Weekly Review - April 13, 2015

Guest Post - Monday, April 13, 2015

Summary

  • Economic data was light and results mixed last week with the ISM services report coming in a bit weaker, but jobs reports—JOLTs and claims—better than consensus. The FOMC minutes generally read as expected, with differing views on the strength of the economy and timing of potential rate hikes.
  • Equity markets gained on the week, led by emerging markets. Government bonds lost ground upon higher rates, although corporates fared better. Commodities generally gained—led by energy—even in spite of a stronger dollar.

Economic Notes

(0) The minutes from the March FOMC meeting didn't offer many surprises, as the attention focused on the timing of the first rate hike in a decade. In the text of the minutes, it appeared that 'several' participants were in support of a June increase, while 'others' were more inclined to wait—the implication being that the former were of the feeling the economy could stand on its own footing, while the latter were a little more concerned about disrupting the slowish economic growth environment so far, coupled with below-target inflation and a strong dollar. Growth forecasts for the near- and intermediate-term were downgraded, with weaker consumer spending, residential investment and net exports, with impacts from the dollar being a big contributor (and taking some time to filter through the rest of the economy). On the positive side, there seemed to be broader consensus that labor conditions have been improving, though not yet perfect (when it is ever?).

The Fed meets again at the end of this month, so everyone will soon have another chance to slice and dice the language. The message and sentiment are as important as the likely small magnitude of any policy change (a change in target rate of 0.00-0.25% to just 0.25%, if anything) at this point, so market watchers are dissecting FOMC member speeches word for word, even using computer software to pinpoint small nuanced changes in tone and mood. Work done by Goldman Sachs showed that, in reviewing over 4,000 Fed 'events' over the last 15 years, the FOMC statement immediately following the meeting is by far the most reacted-to news item (to no surprise), followed by the Fed minutes (less timely, but providing some deeper color into discussions) and lastly by various speeches from the FOMC chair and regional presidents that occur on an almost continual basis around the country. While the formal presentations of these speeches are carefully crafted, the Q&A and ad hoc components can offer additional tidbits that the market can sometimes react strongly to. That's why they're watched so closely, although nuances are often minor.

(-) The ISM non-manufacturing index fell a bit, from 56.9 in February to 56.5 for March. General business activity weakened by a few points, while employment and new orders both improved slightly. Anecdotal commentary discussing current business conditions also remained generally positive; despite the drop and weaker industrial results in recent months, a result over 50 is positive and signifies growth.

(0) Import prices fell in March by -0.3%, which was a tick less severe than forecast. While petroleum import values rose almost a percent on the month, essentially everything else declined—especially food, which fell about a percent. Over the trailing year, import prices have declined over -10%, which is extreme on the surface, but the large drop in oil prices and dollar strength have played a large role. On the positive side, this has kept 'bad' inflation in check ('bad' as in the kind that an economy is the price-taker of, rather than self-generated, so to speak), but lower inflation levels generally worry the Fed, as we've noted.

(+/0) The government JOLTs job openings measure rose a bit more than expected for February, up +168k openings from last month to 5,133k, which is the highest level in the last business cycle. However, the hiring rate was unchanged at 3.5% and quit rate dropped a tenth to 1.9%.

(0) Initial jobless claims for the Apr. 4 ending week rose by +14k to 281k, which was -2k short of expected. Continuing claims for the Mar. 28 week fell to 2,304k, beating expectations of 2,350k, and representing a new post-recession low. No special factors were reported, although there could be a few spring break effects drizzled in. Additionally, claims appear to have risen in Texas and energy-focused regions, which is expected considering the drop in rig counts in recent months.

Market Notes

Period ending 4/10/2015

1 Week (%)

YTD (%)

DJIA

1.68

1.95

S&P 500

1.74

2.68

Russell 2000

0.74

5.33

MSCI-EAFE

1.56

7.91

MSCI-EM

4.05

8.19

BarCap U.S. Aggregate

-0.40

1.65

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

4/3/2015

0.02

0.49

1.26

1.85

2.49

4/10/2015

0.02

0.57

1.41

1.96

2.58

Equities gained on a relatively quiet week, with earnings results just beginning to come in for the quarter. (The traditional early entrant, Alcoa, outperformed, but this first report hasn't been shown to have much correlation to the rest of the market's reports.) From a sector standpoint, energy fared best with some stabilization in oil prices, very low expectations and the Royal Dutch Shell buyout of BG Group, followed by health care and industrials, all gaining over a percent on the week. Industrials were led by General Electric's announcement of the sale of financial/non-industrial assets and upcoming share buyback, and subsequent +10% price gain. Financials and utilities fared worst, with minimal gains, as the latter of which is usually tied in with rising rates. The volatile segment of the moment, biotech, continued this trend.

The bulk of the 1st quarter earnings reports are expected out in coming weeks, and we all know they won't look so great—as estimates have been pushed downward. Expectations are for a drop in overall year-over-year growth, much of which has largely been reflected in guidance. Several of the items saturating the financial news at this point, such as the strong dollar (affecting revenues translated in from abroad), drop in crude oil (reducing energy sector profitability), and West Coast port slowdowns are key stories from the quarter and offset some otherwise positive organic growth. Another harsh winter compared to average didn't help, either, and likely cast a shadow over consumer spending. Of course, if guidance is adjusted too low (which it often is), and companies end up performing just a bit better than expected, we then end up with a positive 'surprise.' This is how that game is played every quarter, so if things turn out strangely better than expected, that's the reason.

From a numbers standpoint, growth is expected to be negative for the quarter, on the order of -2% to -4% for the S&P. These expectations improve into the positive if the impact of the energy sector is removed; in fact, several 'growth' sectors such as healthcare and technology are expected to deliver quarterly earnings gains in the double-digits. For 2015 as a whole, expectations show some recovery potential, with +2% to +4% growth expected overall (when energy is included), and better outside of energy.

Foreign stocks were led by emerging markets, with strong gains in the BRIC countries, core Europe and Japan faring similarly to the United States, with peripheral Europe selling off somewhat. China was the big story on the week, as opened linkages between China and Hong Kong spurred additional speculation, fueled by a Chinese CPI number that came in better than expected. Hopes continue that the Chinese government will do enough via stimulus to stem the growth slump by improving internal consumption.

U.S. bonds pulled back on the week with higher interest rates across the curve; consequently, longer-duration issues fared far worse than shorter-dated debt. High yield and bank loans also performed positively, bucking the general trend.

The U.S. dollar index rose about +2% on the week which turned small local foreign bond returns into losses generally, so dollar-pay bonds outperformed, especially in emerging markets. The foreign bond universe experienced an odd event this week, as Switzerland issued a new bond offering for the first time with a negative yield—a 10-year at -0.06%. Of course secondary market negative yields have been increasingly common in several countries in Europe over the last few months, but this is the first primary issue event (perhaps ever). To boot, the offering was over-subscribed by two times, implying no shortage of demand for the bonds. We've discussed the circumstances before as to why buying a bond with a negative yield-to-maturity would make sense for some, examples being: regulatory mandates (as in a pension fund or other domestic entity with a set need for Swiss bonds), needing to own 'something' (as opposed to just large bank deposits or holding cash), those hoping for a quick profitable trade to an even lower yield, or plays on a potential currency spike are other reasons. Still, spurious and unusual territory.

Real estate gains were led by Asia (including Australia), while Europe and Japan fared decently. Higher interest rates caused U.S. REITs to struggle, although health care and mortgage REITs fared better than residential and retail.

Commodities posted a decent week, up several percent, bucking the stronger dollar. Negotiations with the Iranians over a nuclear deal appeared to be a driver of sentiment in the energy segment—in theory, this removal of one large element of geopolitical uncertainty should serve to depress oil prices further by reducing the 'risk premium' embedded in every barrel of oil (the range of this amount varies with circumstances but can be anywhere from several to several dozen dollars at any given time), and additional supplies through reduced export restrictions even more so. Of course, a long road ahead remains for this agreement, but crude oil bounced around from a few dollars from under $50 last week to almost $52 by Friday, a +5% increase, which led index returns. Other groups hovered around zero, while agricultural commodities deteriorated the most, down -2% upon some improvement in perceived planting conditions in the Midwest; fewer worries in West Africa and Brazil appeared to push prices lower in the soft commodities group.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Mortgage Bankers Association, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for April 6, 2015.

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