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Weekly Review - February 2, 2015

Weekly Review - February 2, 2015

Guest Post - Monday, February 02, 2015

Summary

  • Economic data was highlighted by the conclusion of the FOMC meeting (status quo), GDP for Q4 was slightly weaker than expected, and housing numbers were mixed. Consumer confidence, however, on the heels of cheap gasoline, reached new highs.
  • Equity markets lost ground last week, upon a variety of geopolitical concerns, optimistic Fed sentiment and mixed corporate earnings results. Bonds again shined, as yields fell to lows not seen since mid-2012. Commodities actually rebounded a bit, as oil markets continued to search for a bottom to prices.

Economic Notes

(0) As we mentioned in our special note mid-week, the FOMC meeting didn't surprise on some levels; however, one change that investors took special note of after the fact was the addition of the committee's consideration of 'international developments' into the statement. This wasn't the first time such focus has been included, but did catch a few off-guard. The 'considerable time' wording being removed was more noteworthy, as this laid the general groundwork for a regime change from extremely dovish more toward neutral. Otherwise, the committee noted strength in several areas, including general economic activity, job gains and positives from cheaper oil. This is one of the most nuanced rate-hike preambles in recent memory.

(-) The advance estimate of U.S. gross domestic product for the fourth quarter came in at +2.6%, a bit below consensus expectations of +3.0%. Of course, future estimates will contain increasingly more accurate data, so will better reflect the reality of the quarter, but this is what we have as of now. In the release, consumer spending/personal consumption grew +4.3%, which was better than expected and represents the largest such increase in the post-crisis recovery so far. Residential investment rose a similar +4%, while business fixed investment came in weaker, at just under +2%. Net exports fell by -1%, which one might assume at first glance was impacted from the stronger dollar, but appeared to be due to faster growth in imports (+9%)—the other side of the same coin. Government spending continues to decline (in this case, defense expenditures fell by -12%, which carved -0.6% off of absolute GDP). The employment cost index (which includes wages, salaries and benefit costs, obviously watched for its implications on wage growth), grew at a +0.6% quarterly rate and +2.2% for the full year—so a bit higher than broader inflation.

How does the first quarter of 2015 look? It's early yet, and often, analysts look at the composition of the previous quarter to account for any possible shifts, such as inventories (which added +0.8% to GDP in Q4), that may add or borrow from the following quarter. Currently, consensus estimates are around 3.0% (again), for both Q1 and 2015 overall.

(-) Durable goods orders for December came in weaker than expected, falling -3.4% on the month, compared to an expected gain of +0.3%. The headline weakness was largely due to a large drop in the civilian aircraft series, which is volatile on a month-to-month basis. Removing this impact, the core order series fell -0.6%, which also underperformed consensus hopes for a +0.9% gain. It appears that machinery orders (particularly oilfield-related) were a big culprit, so this represents one of the negative side effects of lower oil prices—we knew there would be winners and losers. Core goods shipments dropped off by -0.2%, which lagged a forecasted increase of +1.0%, and were revised downward a bit for the prior month.

(+) The Chicago PMI rose +0.6% from December's 58.8 to 59.4 for January. The release was led by an increase in new orders and order backlogs, as well as production, which reversed a trend of several consecutive negative months.

(+) The November S&P Case-Shiller home price index rose +0.7%, which was a tick above forecast and the strongest monthly gain in almost a year. All 20 cities posted positive results, led by the Southeastern U.S. (Tampa and Atlanta reaching close to +2%). Year-over-year, the index gained +4.3%, which continues to be impressive from a nominal and real basis. Despite the complaining about housing in some parts of the country post-crisis, any growth above inflation for a single-family home is a historical success.

(+) New home sales for December rose +11.6% to 481k, which sharply outperformed the expected +2.7% increase (to 450k). The Midwest was the sole laggard, while the other three national regions gained. This was a particularly strong month, although there is a bit of noise in this series and revisions can alter these dramatically after the fact.

(-) Pending home sales for December came in a bit weaker than expected, falling -3.7% compared to expectations of a +0.5% gain. This series tends to carry down the pipeline into existing home sales a few months down the line. Sales fell in all areas of the country. For the entire 2014 period, however, pending sales rose +8.5%.

Overall, housing numbers for 2014 weren't terrible, but did leave something to be desired. Single-family home construction remains weak, and the share of first-time homebuyers hit an almost 3-decade low. Other factors in this include stagnant incomes, which act as a headwind to the saving for cash down and monthly mortgage payments, especially when high student loan balances are included in the mix. To boot, mortgage standards have tightened (even if closer to 'normal'—this is a relative comparison to the pre-2008 era where anyone could end up with a flexible mortgage, even without a paycheck). On the positive side, employment markets have improved dramatically, which, if traditional patterns play out, should lead to eventual higher wage growth. Rents are also rising, which could ultimately alter the trade-off between renting and owning. Overall, not enough homes are being built to keep up with long-term demographic demand, but these trends don't reverse themselves overnight.

(+) The Conference Board's consumer confidence index rose almost +10 pts. to 102.9 for January, beyond the 95.5 expected, and its highest level in eight years. Assessments of the present situation and forward-looking expectations both improved sharply, as did the labor differential of jobs being 'plentiful' versus 'hard to get.' There wasn't a lot of detail in this report, but about a fifth of respondents did expect their incomes to rise in the next 6 months, and there tends to be a shorter-term correlation between gasoline prices and household contentment so-to-speak.

(0) The final Univ. of Michigan consumer sentiment survey result for January came in at 98.1, which was just a tick below forecast, but much better than December. Consumer assessments of current conditions were a bit brighter, but expectations for the future ticked down a bit. As with the Conference Board's index, low gasoline prices may have also played a role here. On the inflation side, 1-year ahead expectations ticked up to 2.5%, while 5-10 year forecasts remained near 2.8%. Like the Conf. Board survey, improvement over the past several months has been notable.

Consumer sentiment is relatively simple in many respects—nothing makes consumers happier than stronger job prospects and cheap gas; just like the inverse of expensive fill-ups coupled with job losses can make the average consumer feel that the world is coming to an end. Regardless, higher confidence readings do tend to be a positive factor for consumer spending, which is why they're watched in the first place.

(+) Initial jobless claims for the Jan. 24 ending fell dramatically to 265k, which outperformed consensus calls for 300k. The DOL didn't mention any unusual items specifically, but it could partially have been due to the MLK day-abbreviated week (seasonal-adjustments get more difficult when weeks are shorter in length). Continuing claims for the Jan. 17 were also lower, at 2,385k, compared to an expected 2,405k.

Market Notes

Period ending 1/30/2015

1 Week (%)

YTD (%)

DJIA

-2.87

-3.58

S&P 500

-2.75

-3.00

Russell 2000

-1.96

-3.22

MSCI-EAFE

-0.26

0.49

MSCI-EM

-2.96

0.55

BarCap U.S. Aggregate

0.59

2.10

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

1/23/2015

0.02

0.52

1.33

1.81

2.38

1/30/2015

0.02

0.47

1.18

1.68

2.25

U.S. equities fell again this week, taking January as a whole into the negative. The negativity last week originated from a variety of factors, including Greek elections, a FOMC that appeared more optimistic on economic growth than in previous meetings (ironically, bearish to many as it raises the chances and shortens the timeline for a rate increase) and a mixed bag of corporate earnings. From a sector standpoint, all industries were in the red, with materials and consumer discretionary holding up best, while tech and consumer staples coming in worst.

Other than fears of slowing global growth, corporate earnings have been a primary story of the last several weeks, now that over half the S&P's market cap has reported. The results are all over the board, with investors focusing on currency impacts from a strong dollar, as well as carryover effects from cheaper oil. The currency picture has affected revenues more than it has earnings, and may have accounted for up to a few percent of earnings growth (or non-growth). The energy sector accounted for much of the earnings deterioration (energy company earnings down -20%), while, when energy is removed, other sectors came in generally in the higher-single to lower-double-digits in terms of growth. All-in-all, positive surprises continue to outweigh the negative for earnings and revenue (when don't they), albeit to a lesser degree than in prior quarters. Overall, a net quarterly decline in earnings is expected, and this could carry into Q1 of 2015.

Foreign stocks were mixed, with Europe losing just marginally (worse with USD impact than in local terms), while Japan and developed Pacific markets gained. Emerging market stocks were sharply lower, led by poor performances of the 'BRICs,' which make up 40% of the MSCI emerging markets index (more than half, if 'edge of developing' markets Taiwan and South Korea are excluded). Russia also lost ground, with continued uncertainty and a surprise cut in rates from 17% to 15%—concerns continue to fester about the Russian central bank's objectivity and freedom from Kremlin influence, which no doubt has contributed to poor market results (on top of oil and geopolitics). Chinese stocks fell on top of weaker industrial profits, which has continued a multi-month trend.

Greek stocks were down almost -20% on the week, mostly early on, as the anti-austerity Syriza party ended up with the parliamentary majority. This obviously raised concerns over potential policies not in the best interest of the euro, and more immediately, the willingness to handle debt repayments. So far, in reality, the bark of Greek politics has been worse than the bite, as many Greeks (at least as noted through surveys) begrudgingly admit the positives of currency union membership outweigh the negatives, and most analysts believe this thinking will keep policymakers from veering too far to the extreme.

Bonds experienced another up week as risk-off sentiment pushed rates lower by 10-15 basis points. Long duration treasuries fared well, keeping their year-over-year returns to equity-like levels, but most all fixed income ended up with positive absolute returns in one degree or another. Despite frustration for those not invested in the longest-term treasuries over the past 12 months, it brings up questions about what type of assumptions are baked into a 1.7% yield on the 10-year and 2.25% on a 30-year bond. For longer-term bonds, expected inflation is one of the larger inputs over time (other than term premium and 'real' return components)—do markets expect inflation rates this low for the next several decades, or are there merely shorter-term technical factors driving yields to these extremely low levels? We were just reminded that current 10-year levels are below that seen at any time during the Great Depression. Granted, one has to take into consideration different base starting points and modern market dynamics/liquidity, but it does provide an interesting perspective.

Outside of the U.S., most developed market debt fared well in local terms, with some deterioration when translated back to USD, while emerging market debt was generally flat on average.

Real estate lost ground on the week, in keeping with broader risk assets, with the exception of European REITs. On the domestic side, mortgage REITs fared well upon lower rates, while lodging/resorts suffered likely due to concerns about marginal global growth prospects (with 'leases' as short as one night, hotels tend to be at the forefront of sentiment about future economic prospects, relative to real estate with longer-term locked-in lease periods).

Commodities experienced a rare positive week, with the GSCI index gaining close to +3%. West Texas crude actually gained ground, ending near $48 after falling as low as $44.50 mid-week, taking crude indexes to a nice gain. Charts for the last few weeks of trading sessions appear to show a bit of consolidation as oil appears to be looking for a bottom, and the choppiness of trading seems to this. Nickel and cotton also gained ground on the week, while the losers were wheat, silver and natural gas (the latter almost always being weather expectations vs. inventory-dependent).

Interestingly, statistics have demonstrated that 'oil-derivative' assets (such as oil-levered equities and foreign exchange) have performed better than would be expected given the severe oil price decline. While economists continue to debate the causes of oil's plunge being caused by lower demand or a stockpile of supply, such tendencies may point to today's situation looking more like the 'oil glut' experience of the mid-1980's, but time will tell.

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, 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 January 26, 2015.

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