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Weekly Review - May 4, 2015

Weekly Review - May 4, 2015

Guest Post - Monday, May 04, 2015

Summary

  • The economic picture last week was colored by a poor U.S. GDP release for the first quarter, as well as acknowledgment by the FOMC of slowed conditions. However, other data, such as the ISM and Chicago PMI came in mixed to a bit better. Jobless claims are one stat that has continued to show improvement in the labor market.
  • Interestingly, both stock and bonds experienced negative returns last week, as did real estate, upon worries of slower growth yet also rising interest rates. Commodities gained with a weaker dollar and continued higher pricing in energy.

Economic Notes

(0) As we discussed mid-week, the FOMC didn't alter policy and the statement itself was little changed. The biggest differences were an acknowledgement of weaker winter data, which was assumed to be transitory due to lack of alarming language in the statement. Based on prior speeches, three criteria Janet Yellen has laid out for making a rate move (even as precursors to seeing higher core price inflation or wage inflation) are: further improvement in the labor market, stabilization of energy prices, and a leveling out of the value of the U.S. dollar. Not part of the Fed's mandate per se, but certainly areas of concern as related to economic slowing in recent months. So, these are factors to watch.

(0/-) The ISM manufacturing index for April was unchanged, coming in at 51.5, falling just short of the expected 52.0 reading. (Of course, anything above 50 does represent growth over the prior month, just not at an accelerated pace.) Production and new orders, including export orders, rose several points, while employment fell by almost -2 points, under the baseline of 50 and, interestingly, to its lowest reading in over five years. Prices paid rose a bit, but remained low overall. The anecdotal commentary attached to the report was generally positive, other than challenges faced due to a stronger dollar and West Coast port slowdowns that have peppered almost every discussion over the past several months.

(-) Total vehicle sales for April came in a bit below expectations, at a rate of 16.5 million vehicles (compared to 16.7 mil. expected) as Asian car maker numbers disappointed, offsetting a stronger trend for U.S. trucks and SUVs. Average prices are up about $1,000 from a year ago (to $31,200) while some concern exists over increasingly longer loan terms (now up to 7 years in some cases).

(+) The Chicago PMI index for April rose +6 points to 51.3—the highest level this year. Four of the five primary components gained, including a sharp gain in new orders to reverse a drop from prior months. Production also rose out of contractionary territory into expansion, which is a positive.

(0) Personal income for the first quarter came in flat, versus an expected gain of +0.2%. Wages/salaries actually rose by a few tenths in line with consensus but 'disposable income' was unchanged. Personal spending rose +0.4%, just a tick under forecast, bringing the personal savings rate down -0.4% to 5.3%. The PCE price index gained +0.2% for March, which was on par with expectations; the core measure gained +1.3%. The entire grouping was naturally below the Fed's 2% target but in a similar range to other inflation measures, such as CPI and PPI.

(-) Construction spending fell -0.6% in March, which stood in contrast to the +0.5% gain expected. Residential construction fell by -1.6%, explaining the bulk of the decline, as nonresidential fell by only a tenth of a percent. Year-over-year growth has fallen to just over +2% after waxing and waning in the 5-10% area for the past several recovery years. This series has maintained an upward trend from its low point in Feb. 2011 but gas leveled off in recent months at about -20% below peak spending levels reached in mid-2006. This, no doubt, has frustrated economists and policymakers.

(+) The S&P/Case-Shiller Home Price index for February rose +0.9%, which outperformed expectations calling for a +0.7% gain. All 20 cities experienced positive results for the period, with San Francisco leading the way with an over +3% increase. Year-over-year, the index rose at a +5% rate.

(0) Pending home sales for March were largely in line with expected, rising +1.1%, which was a tenth better than expected, although the index level is the highest in almost two years. Gains were seen in the South (+4%) and West (+2%), while the Northeast and Midwest fell by a few percent each. The year-over-year increase was more impressive, up +11%. Most importantly, this measure generally translates to higher existing home sales in coming months after the report (as 'pending' would allude to).

(-) The Conference Board consumer confidence survey fell just over -6 points to 95.2 in April, disappointing consensus expectations calling for a slight decline to 102.2. Consumer assessments of the current situation fell by -3 pts., while future expectations declined by almost -9 pts. The labor differential (jobs being abundant vs. difficult to find) also fell by several points. Overall, this was a generally weak report, although these can be sporadic.

(-) The NFIB small business optimism index fell to almost -3 points from February's 98.0 reading (and expectations for no change) to 95.2 for March. All segments of the index came in weaker, with expectations for an improving economy falling the most, along with job openings. However, the proportion of firms raising worker comp over the last quarter rose a few points.

(0) The final Univ. of Michigan consumer sentiment survey for April was essentially unchanged from the initial estimate, coming in at 95.9, a tick under forecast. Consumer assessment of current conditions fell by a point, while future expectations moved upward by roughly the same amount. Inflation expectations for the year ahead rose slightly to 2.6%, which matched the unchanged 5-10 year-ahead projections.

(+) Initial jobless claims for the Apr. 25 ending week came in at 262k, below the 290k expected. Continuing claims for the Apr. 18 week came in better than expected, at 2,253k, compared to consensus of 2,300k. No special factors appeared to color the results. As seen by the fact that both of these series reached their lowest levels in 15 years (!), these metrics continue to show strength, although the more dramatic improvements have tempered as of late.

(-) The advance estimate of 1st Quarter GDP came in much worse than expected—showing a gain of +0.2%—relative to the already-tempered expectations of +1.0% or so. As feared, the foreign trade component removed -1.3% outright from the overall figure (as exports deteriorated more than imports), so the stronger dollar has likely played a major role, as did port slowdowns on the West Coast, which affected export activity in a more direct/logistical manner. Business fixed investment fell by over -3%, which is largely blamed on energy sector construction scale-backs, and removed almost a half-point from the absolute GDP figure. However, by contrast and less affected by export activity, personal consumption grew +1.9% for the quarter, which actually outperformed consensus estimates of a +1.7% gain. Inventories also added +0.7% to the overall figure. So, while business activity was sub-par, personal household activity wasn't quite as bad.

Early estimates of GDP are always spotty and will be revised up or down in coming months when more precise data is substituted in, but this was certainly a disappointment. Compared to expected, the stronger dollar and weak energy pricing environment played more of a negative role than some expected. Weather has been a big factor for the last several winters, but this impact can be difficult to estimate and assign to specific categories—in fact, Q1 has been weaker than the surrounding Q4/Q2 quarters in 20 of the past 25 years. For Q2, hopes are higher. Even if not back to a more normalized growth pattern, weather effects will have dissipated somewhat and with the dollar flattening somewhat in recent months, the currency effect may be lessened as well.

What should be expected for GDP? Consensus estimates for the 2nd quarter are starting around 2.5-3.0%, which includes some hoped-for bounce-back effects from a difficult winter. Longer-term, it gets trickier. No doubt, growth has slowed in not only the U.S. but also in other major developed economies—even more so, in fact. Since the modern data set began in the late 1940's, the simple average of GDP changes on a seasonally-adjusted average-annualized rate has been +3.3%. However, since 1990, this has fallen to +2.5%, and from 2000, to +1.9% (granted the financial crisis skews the figures to a greater degree for that short of a time period—if we remove 2008 and 2009 entirely, we end up with +2.4%, so in keeping with the recent multi-decade average). Some would argue that demographics, resulting in a smaller workforce and lessened demand for overall consumption, has permanently depressed economic growth. Likely, there is some validity to this argument, some of which may explain the longer post-recession recovery period of the past several years. The same argument could be said for developed Europe and Japan to an even greater degree, where growth has been stuck between zero and 1.5% or so on a multi-year basis. So, by comparison, the U.S. hasn't fared as badly.

This has been recognized by companies for quite some time, as the percentage of operations and revenues from abroad have increased dramatically over the years—the search for sales growth has made this a necessity. Naturally, this search for growth leads us again into the emerging markets, where despite outright growth that isn't quite what it once was in some larger BRIC nations (as they've matured), 5%+ rates remain achievable as demographic trends of larger populations, improving spending power and globalization of information (everyone wants the latest smartphone) remain very powerful.

Market Notes

Period ending 5/1/2015

1 Week (%)

YTD (%)

DJIA

-0.31

1.81

S&P 500

-0.42

3.03

Russell 2000

-3.09

2.32

MSCI-EAFE

-0.90

8.85

MSCI-EM

-1.37

9.38

BarCap U.S. Aggregate

-0.92

0.91

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

4/24/2015

0.03

0.54

1.34

1.93

2.62

5/1/2015

0.01

0.60

1.50

2.12

2.82

U.S. stocks lost some ground on the week, although large-caps sharply outperformed small companies, which lost several percent. However, the poor GDP report created a generally negative tone on the week, although remaining big earnings reports were generally neutral to positive, as in prior weeks. From a sector standpoint, materials and energy were the clear winners, gaining over a percent each, while health care and cyclicals lagged by roughly the same amount.

Foreign stocks fared far worse than domestic names, although a decline in the dollar last week helped temper the impact somewhat in developed markets; emerging market currencies were generally little changed compared to the dollar. Peripheral Europe performed well with talk of possible debt extension for the Greeks, which carried over into strong returns for Spanish and Italian equities, which bucked the trend of general indexes, while Europe overall was flat. Japanese stocks lost significant ground, upon worries of slower U.S. growth and how it could carry over to their own earnings picture.

In contrast to the normal risk-on/risk-off trading, U.S. bonds lost ground with rising yields. Bank loans fared better, as did shorter-duration issues, compared to longer-term government debt. Foreign fixed income was mixed in both developed and emerging market regions, as interest rate policy continues to diverge around the world.

Real estate generally lagged, adding to poor results for the past three months, as higher interest rates and slow economic data weighed on the group. Asian REITs bucked the trend; the sleeve in portfolios from foreign real estate helped temper poor performance from the domestic group over the past several months.

Commodities rose on the back of several segments, including industrial metals (namely copper, zinc and nickel) as Asian demand appeared to creep up. Crude oil gained a few dollars to end the week at just over $59/barrel. While sporadic trading continues, this represents nearly a +40% increase over the lows of $42.50 back in mid-March. Refineries returning from maintenance lulls may account for some of the inventory drawdown, although it remains at high levels. The well-worn saying 'the best cure for low oil prices is low oil prices,' certainly appears as appropriate now as ever. Agricultural futures lost a few percent as crop supplies in several segments continued to grow. Gold experienced a bit of a pop early in the week due to some unique circumstances before falling back to earth by Friday—apparently Venezuela 'pawned' $1 bil. worth of sovereign gold holdings to Citigroup for cash, to shore up the nation's finances in light of much lighter oil revenues in recent quarter. Even if this isn't the start of a trend, it does highlight the pressures faced by some of the more dire emerging/frontier market nations.

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 April 27, 2015.

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