April 2015 Monthly Strategy Dashboard

March Wrap-Up: Don’t Miss the Forest for the Trees

As March spilled into April, investors had plenty to ponder starting with what weight (importance) to attach to March’s disappointing non-farm payroll number, which came in at 126,000 jobs added versus expectations of a survey of economists for 235,000 jobs

First the bad news:

In the first quarter U.S.-based investors had found themselves with a full plate of challenges to contend including:

• A strong dollar advanced 8.96% versus a basket of six developed market currencies. The euro fell 11.3% against the dollar, cutting into U.S. multinational corporate earnings results and their competiveness versus foreign peers as well as reducing investors’ returns in U.S. dollar-based investments abroad even as foreign markets advanced.
• Slow wage growth remained a drag on the economy stateside and an impediment to the Fed’s plans for rate normalization ostensibly pushing the first rate hike out toward September
• Oil prices moved lower, then higher, then lower, then higher, causing consumers to mistrust the sustainability of cheap gas at the pump, resulting in their saving instead of spending dollars saved at the pump
• As the quarter progressed, the possibility of more oil supply becoming available if Iran accepted a proposed agreement with the West added to the uncertainty, volatility and confusion around the future direction oil prices.
• The consensus earnings forecast for the S&P 500 turned negative for the first three quarters of the year. Consensus analyst projections based on Bloomberg data are now calling for the S&P 500’s first negative earnings quarter since 2009.
• According to Bloomberg data, analysts have slashed earnings expectations for Q1, Q2 and Q3 respectively to -5.8%, -4.2% and -1.0%. As recently as December 31st of last year consensus was for positive earnings growth in the quarter. Manufacturing data softened in Q1 reflecting the dollar’s strength, cold weather across the country and a labor dispute that shut down the movement of goods from ports on the West Coast.
• Considering that the market is a mechanism that actively seeks catalysts to point it in the direction it will go next, some degree of confusion and an increase in turbulence came as no surprise to us.
• By the end of the first quarter yields were lower than where they had ended 2014, with the 10-year Treasury note showing a yield of 1.92%, down from 2.17% on December 31st. Once again the process of normalization appeared to be in a stall phase.

While we suggest that investors keep seat belts fastened as the process of normalization works its hurdles and volatility likely increases, we suggest they don’t get too carried away by the message coming over the intercom and risk missing the forest for the trees.

Now the Good News:

While the performance of the S&P 500 lagged in the first quarter of the year (up just 0.44% in the period), as earnings plunged in the energy sector, a strong dollar broadly trimmed multi-national earnings, and slow wage growth saw consumer spending moderate,

• The S&P 400 (mid-caps), the Russell 2000 (small-caps) with less negative exposure to the strong dollar, advanced respectively 4.93% and 3.99% in the first quarter. The NASDAQ composite (weighted some 50% in technology and broadly exposed to innovation and “growthier” issues) advanced 3.48% in the period.
• Foreign developed markets as represented by Europe’s Stoxx Euro 600 and Japan’s exporter-laden Nikkei 225 advanced respectively 15.99% and 10.06% in local currency and somewhat less translated into dollars (2.83% and 9.61% respectively).
• Signs of green shoots became more evident in the euro zone as QE worked through the region even as Greece’s travails and worries over a possible “Grexit” persisted.
• While gauges of manufacturing showed weakness in the period, services continued to show strength as consumer confidence rose stateside to cyclical highs on improvements in the jobs market even if not reflected in significant progress in wage growth 
   

What’s Likely Ahead?

• We expect that the change of seasons will bring better weather.
• The labor dispute in the ports on the West Coast has been settled and progress has already been significant in breaking a log jam in shipments that affected stateside manufacturers, retailers and consumers. Expect broad distribution of goods to improve markedly and be reflected in the broader economy as the second quarter unfolds.
• Central bank accommodation and vigilance for signs of disinflation and deflation remain a global dynamic. Inflation is not the issue; reflation is the goal for most.
• The dollar’s run-up against the euro appears to us to have nearly run its course after a rise of around 23% in a 12-month period and around a 12% advance in the first quarter of the year.
• One bad month in the non-farm payroll number does not make a trend. April could see an improvement in the number and even a positive revision to March. The 12-month average for the non-farm payroll number stands inclusive of the March number at 260,000. Volatility in economic data is not uncommon.
• A recipe of affordable labor, cheap oil, low interest rates and rising consumer confidence could lead to more positive outcomes in earnings, economic growth and stock prices this year despite a rough-edged first quarter.

Stay tuned.

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