Market Recap

April 18, 2016

Last week’s momentum carried over to this week as equity markets finished the week positive across the board.  For the week, the DJIA closed the week at 17897 for a weekly gain of 1.85%.  The broader-based S&P500 ended the week at 2081 for a weekly gain of 1.65%. Smaller US companies represented by the Russell 2000 were even better as the index finished up 3.08% for the week.  International markets were also strong as both the MSCI EAFE and MSCI EM were up 3.61% and 3.69% respectively.  Treasury rates were slightly lower across the board with the 10yr US Treasury closing at a yield of 1.76%.

Earnings season kicked off this past week with only a fraction of S&P500 companies reporting.  Results have been relatively positive versus expectations with over 70% of companies reporting earnings ahead of analyst expectations.  In global economic news, the IMF (International Monetary Fund) cut its global economic growth outlook to 3.2% (down from 3.4%), largely due to China and weak commodity prices.  The revision marks the fourth straight cut in their 2016 forecast but the IMF does think conditions will be begin to normalize next year as they increased their 2017 Global GDP estimate to 3.6%.  Domestic economic news for the week was as follows: Retail sales declined 0.3% m/m vs. expectations of 0.1% gain; Import prices increased 0.2% m/m while PPI decreased 0.1% m/m; The consumer sentiment index fell to 89.7.

Be on the lookout for our client quarterly reports along with our 1st quarter newsletter Fed Trumps Market Anxiety. Have a great week.

“What you do today can improve all your tomorrows.”  –  Ralph Marston

Let the Drama Begin

April 11, 2016

The markets ended a tough week on an up note in response to the Fed’s late-Thursday verbal intervention. Yellen and three former Fed leaders talked up the prospects for the US economy and promised a “reasonable path” for interest-rate increases. Rising oil prices also helped Friday’s market uptick, but the week was still down 1.2% or more, depending on the index. The 10Yr US Treasury closed the week at 1.72%, mostly flat for the week.

The upcoming earnings season is already expected to be dismal, with S&P 500 contracting ~8.5% in the first quarter, the 4th consecutive quarterly decline. Unfortunately, these low expectations do not guarantee that “bad news is good news”. Witness Gap Stores’ late-Thursday warning about lower sales and shrinking profit margins, which produced a 14% stock price decline. Alcoa will initiate actual earnings reports on Monday.

On a lighter note, it is encouraging to see American private-sector risk-taking succeed. Last Friday Elon Musk’s 15 year-old Space X Corp successfully recovered the first stage of its Falcon 9 rocket [from a barge in the Pacific ocean!], which was part of a launch of its Dragon spacecraft to the International Space Station. The ability to recover and reuse rockets is key to achieve space access cost reduction.

“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.”  ― John F. Kennedy

Earnings Season

April 4, 2016

U.S. stocks rose last week following positive economic news and dovish comments from Fed Chairwoman Janet Yellen indicating that the Fed will continue to move ”cautiously” in raising interest rates. The US Labor Department reported that the economy added 215,000 jobs in March – (in-line with expectations) while the unemployment nudged higher to 5% from an eight year low of 4.9%.  U.S. manufacturing expanded in March for the first time since last summer … perhaps portending an improvement in U.S. manufacturing as the economy moves past the effects of a strong dollar and low oil prices.  Consumer spending rose slightly in March, but January’s number was revised lower causing some economists to revise forecasts for first quarter GDP growth to the 1% area.

For the week, the S&P 500 was up 1.8% while the DJIA increased 1.6% marking the sixth weekly gain for both the S&P 500 and DJIA in the last seven weeks. International equities were positive for the week as the MSCI EAFE ticked up 0.07% while he MSCI EM closed 1.58% higher. Treasury yields moved lower last week as the 10YR Treasury closed at a yield of 1.79%.

First quarter earnings will likely be lackluster as 94 of the 500 S&P companies have already issued guidance which was below previous analysts’ estimates. According to the Wall Street Journal, first quarter earnings estimates for the S&P 500 are expected to decline by 8.5% marking the fourth consecutive quarter of declining earnings.  Earnings should start to look better as the year moves on as year-over-year comparisons become more favorable.

“It’s the little details that are vital. Little things make big things happen.”  –  John Wooden

Stocks Give Back Ground …

March 28, 2016

Equity markets snapped their five-week winning streak as domestic and worldwide markets gave back ground mostly as a result of comments from Fed President James Bullard and the horrific attacks in Brussels (and later in Pakistan).    Bullard commented on Wednesday that an April interest rate hike is possible should economic conditions continue to improve.  Other Fed members seemed to back away from Bullard’s comments as the week went on. We would note that the fed-funds futures market indicates the odds of an April hike at close to zero while the odds of a July hike remain less than 50%.  Interestingly, oil also broke its five-week rally with crude prices falling 4% to $39.46 per barrel … perhaps just a coincidence

For the week, the DJIA finished lower by 0.49% while the broader-based S&P500 closed down 0.67%.  International markets also were down with the MSCI EAFE closing down 2.7%.   Fixed income, represented by the Barclays Aggregate, finished essentially flat for the week.  As a result, the 10 YR US Treasury closed at a yield of 1.90%.

Economic conditions appear to be slowly improving.  Improving employment data, low inflation, low rates, slowly improving manufacturing and reasonable consumer confidence should keep markets mostly range-bound for the short-term.  First quarter corporate earnings, due out over the next month, will likely be challenged, but markets have mostly discounted this news.

Lastly, our hearts and prayers go out to the victims and their family members of the tragic attacks in Brussels and Pakistan … enough is enough.



March Madness

March 21, 2016

Equities continued their march higher for a fifth straight week as the S&P 500 and DJIA climbed out of the red in terms of year-to-date performance.  For the week, the DJIA closed at 17602 for a weekly gain of 2.26%. The broader-based S&P 500 closed at 2050 to finish up 1.37% for the week.  International markets were also strong as the MSCI EAFE and MSCI EM finished the week up 1.02% and 3.28% respectively.  Treasury yields closed the week lower across the broad; the dollar weakened vs most other currencies following the Fed’s decision to maintain interest rates; oil continued its rally with West Texas Intermediate (WTI) and global Brent closing above $40/barrel.

Major economic news for the week included: Commerce Department reported Tuesday that retail sales dipped 0.1% in February beating expectations; the producer price index (PPI) fell 0.2% in February in-line with expectations; on Wednesday, the Consumer Price Index (CPI) fell 0.2% in February and is now up 1% for the last twelve months.  The most important economic news for the week came Wednesday as the Federal Reserve announced it held benchmark rates constant and lowered its forecasts for both year-end 2016 and year-end 2017. Specifically, the statement noted that economic activity has been increasing at a moderate pace on the back of increased household spending.  The Fed left open the timing of future rate hikes and now expects two rate hikes in 2016 instead of four.

Despite more dovish guidance from the Fed, markets should continue to remain volatile as diverging monetary policies, oil volatility, and the political rhetoric remain.  As always, don’t look too much into the day-to-day noise of the markets and keep your eye towards the long-term.

“In politics stupidity is not a handicap.”  –  Napoleon Bonaparte

Getting Closer to Break-even

March 14, 2016

In the absence of any significant domestic economic headwinds, stocks were able to advance for the 4th consecutive week. The S&P 500 advanced 1.1% to 2022.18, regaining the level of its 200-day moving average of 2019.9, but still down 1.1% YTD.

Thursday’s European Central Bank policy meeting [temporarily] fulfilled all of the bulls’ hopes. The new stimulus included expanding quantitative easing by 33% [to €80 B/mo!] and added corporate bonds to its asset purchase program. Unfortunately, [or fortunately, depending on your position and time-frame] the euphoria was short-lived, since Mario Draghi suggested that rates were unlikely to be pushed any lower.

This week’s calendar is much more active, with retail sales, inflation, industrial production, employment energy and sentiment all vying for attention. Nonetheless, central banks will likely still hog the spotlight, with the Fed releasing its latest policy statement on Wednesday. The markets are not expecting any change in rates this month but are looking for additional FF increases this year. The Fed’s “dot plots” will confirm [or not] this likelihood.

“Monetary policy does not work like a scalpel but more like a sledgehammer” Liaquat Ahamed

Earnings Continue to Lag

March 7, 2016

Stocks advanced for the 3rd consecutive week on improving sentiment. For the week, the DJIA increased 2.24% while the broader-based S&P500 was up 2.71%. Smaller US companies and international equities were even stronger with the Russell 2000 advancing 4.34% and the MSCI EAFE and MSCI EM up 4.67% and 6.92% respectively.

Fixed income markets lost ground for the week as the yield on the 10yr U.S. Treasury backed up to 1.88% from 1.76%. The European Central Bank (ECB) is set to meet on Thursday and there is widely held expectations that Mario Draghi and his colleagues could cut the bank’s deposit rate and push rates in Europe even further into negative territory. Analysts’ expectations for the Fed which meet later this month are to hold off on any increase in March.

U.S. corporate earnings continue to fall largely as the result of negative earnings in the energy and materials sectors. According to the Wall Street Journal, with nearly all companies reporting for the 4th quarter, S&P 500 4th quarter earnings have declined 3.4% marking the 3rd consecutive year-over-year quarterly earnings decline. Analysts’ outlook for 1st quarter 2016 is also bleak with analysts anticipating earnings to fall by 8% from the prior year … which has been adjusting down from a 0.3% increase at the start of the year.

Meanwhile, stay the course!

“If you have to forecast, forecast often.” – Edgar Fiedler

Leap Year?

February 29, 2016

Last week, equities rose again for the second week of the “relief rally”. The S&P 500 advanced 1.63% while the DJIA closed the week with a 1.56% return. Interest rates were mostly flat for the week as the 10 year US Treasury closed at a yield of 1.76% – a slight increase from 1.74% the previous week. Oil prices, the new indicator for global economic growth, were buoyed by potential OPEC cuts, or at least freezes, and continued fall in the number of US operating oil rigs. There was also positive economic news with the Commerce Department reporting its fourth-quarter GDP estimate which was revised upward to 1% … double economist’s expectations.

There is evidence of market rotation out of conservative plays and into financials, oils and growth sectors. The Dow Jones Utility Average fell 2.9% on Friday, normally a safe haven for equity investors. Dividend payers, however, have outperformed the S&P 500 so far this year. The S&P High Yield Dividend Aristocrats (stocks that increased their dividends every year for at least 20 years) are up so far this year 1.91%, including dividends, while the S&P 500 has returned -4.3%.

“Look twice before you leap.” – Charlotte Bronte

Relief Rally

February 23, 2016

Equity markets experienced a much needed relief rally last week as all major equity indexes were up over 2% for the week. The S&P 500 closed at 1918 to book a weekly gain of 2.91% while the DJIA was up 2.75%. Smaller US Companies represented by the Russell 2000 were up 3.93% for the week. International markets were also positive as the MSCI EAFE and MSCI EM were up 4.45% and 4.22% respectively. Treasury yields moved slightly higher for the week as the 10yr US Treasury closed at a yield of 1.76%.

On Wednesday, the Fed released their minutes from January’s policy meeting noting that downside economic risks have increased since last month’s rate increase but labor markets have continued to strengthen. Economic reports for the week were mixed: the Labor Department reported the producer price index increased 0.1% for the month of January beating expectations … housing starts in January fell 3.8%, marking the second consecutive month of declines … jobless claims for the week ending February 13th were 262,000 (which marked the 50th straight week that number has been under 300,000) … core CPI increased 0.3%m/m topping expectations.

Possibly much more far-reaching than the Fed’s monthly meeting notes is the increasingly visible notion that $100 bills will be withdrawn from circulation. Lawrence Summers lofted the idea last week, arguing that the $100 bill is tied to crime and corruption. A more likely reason (according to the Wall Street Journal) is that the Fed is preparing to take Fed Funds into negative territory during the next economic “emergency”, and this hideous idea would be “more effective” if high-denomination paper currency is no longer an available alternative for citizen savers.

Never let a crisis go to waste [it’s an opportunity to do things previously unimaginable]” – Rahm Emanuel

Volatility Continues

February 16, 2016

Despite a sharp rally on Friday, markets finished the week in the red again as concerns over global growth and monetary policy resulted in new lows for both the S&P 500 and DJIA on Thursday. For the week, the S&P 500 closed at 1865 for a loss of 0.72%. The DJIA closed at 15974 for a weekly loss of 1.23%. Negative rates and their effect on Europe’s bigger banks led the MSCI EAFE to a weekly loss of 4.71% (MSCI EM was also not immune as the index closed down 3.82% for the week). Treasury Yields and gold were strong for the week as investors piled into safe-haven assets. The yield on the 10-Yr US Treasury closed the week at 1.74% down from 2.27% on 12/31/15 … compare that to the yield on the S&P 500 of 2.25%.

Fourth Quarter equivalent earnings have been relatively positive compared with analyst expectations. On Wednesday, Fed Chair Janet Yellen issued her testimony in front of Congress and re-emphasized the risks at hand which include: financial market volatility, lower stock prices, uncertainty around China, currency, and deflation. She indicated the merging of these risks could have an effect on economic growth. She did not completely rule out the possibility of negative rates or a rate hike in March … market expectations believe the possibility of a hike are unlikely. On Thursday, the DOL reported initial jobless claims for the week ending Feb 6th were 269,000, 16k lower than expected and well below 300,000 which is considered healthy. On Friday, the Commerce Department reported a better than expected retail sales figure … remember the U.S. consumer represents 2/3 of U.S. economic activity. Retail sales increased 0.2% m/m in January with a similar revision to December’s number. Retail sales are only up 1.4% y/y and it remains to be seen if consumer spending will start to see the tailwind from lower prices at the pump.

Being invested in equities so far this year has been far from a comfortable feeling for investors. Equities experienced their 2nd “correction” in less than six months, testing the patience of investors everywhere. While stock prices have fallen, so have valuations for equities. Historically, P/E is not a great predictor of short-term performance for equities but is much more reliable over a longer time horizon. The S&P500 is currently trading at 14.7x forward earnings and as illustrated in the chart below, is attractive for equities over the long-term.
p.e mult
Source: Standard & Poor’s, J.P. Morgan Asset Management, Weekly Market, Recap February 15, 2016.

“For success, attitude is equally as important as ability.” – Walter Scott