May 2015 Monthly Strategy Dashboard

April Wrap-Up:

Multiple transitions on the economic landscape and in the markets globally clouded the horizon for stateside investors last month.

With the arrival of April had come hopes that the second quarter would bring improved economic growth and greater clarity as to when and by how much the Fed would take action to adjust monetary policy and set the stage for interest rate normalization.

Instead, economic data proved mixed with a bias toward sluggish growth causing the Fed to appear less prone to raise rates than some thought it would be at this juncture in the expansion.

As Q1 earnings season got underway, the effects of the substantial drop in oil prices coupled with capex cuts across the energy sector caused trepidation about progress in wage growth and prospects for negative impact on earnings in sectors with exposure to Energy like Materials and Industrials.

By the time the last page on the April calendar closed, the major U.S. indices had posted mixed results with the S&P 500 up a modest 0.85%, the S&P 400¹ (mid-caps) off 1.56% and the Russell 2000² (small-caps) off 2.61%.

Foreign stocks won the bid in April as investor confidence about the effects of quantitative easing (QE) in Europe and Japan rose, boosting MSCI EAFE³ (Developed markets ex-U.S. and Canada) up 3.73% priced in US dollars in the period.

Emerging markets bested stateside and developed market equities as MSCI Emerging⁴ markets posted a gain of 7.51% in the period priced in USD.

The Frontier markets moved higher, nearly in line with Developed markets, gaining 3.46% in the same period in USD.

The U.S. dollar declined in April reflecting investor concerns about growth and relative valuations stateside as well as confidence in prospects for growth abroad. The dollar as tracked by the DXY⁵ index declined 3.82% from the start of the month to the end of the month in April and dropped nearly 5% from the high for the year thus far posted on April 13th.

The dollar’s decline in April boosted returns of U.S. investments in assets domiciled abroad.

The price of oil as represented by WTI⁶ - West Texas Intermediate  rocketed 25.27% from the end of March through the end of April as investors took into account drastic cuts in stateside rig counts and capex cuts, which sliced into projected growth.

S&P 500 earnings for the first quarter reported in April came in ahead of consensus expectations with some 73% of companies reported beating analyst earnings projections. Some 53% of companies reported revenues (sales) results that bested expectations. The first week of May brought nervousness tied to a reversal of yields in European sovereign debt as bond prices fell.

Bond buyers appeared to show “buyer’s remorse” toward negative yields in the region with the exception being Greek debt.

As yields rose in Europe, so did yields stateside with the 10- year U.S. Treasury yield touching an intra-day high of 2.3% in the course of the week.

Rising yields early in the first week in May trimmed prices in the stock market.

After the release of the non-farm payroll number last Friday, yields declined some with the 10-year Treasury yield closing the week at 2.15%.

What’s Likely Ahead?

We expect that the change of seasons will bring not just better weather, but improved economic and earnings data as the second quarter establishes some distance from the first quarter.

We look for improvements in growth abroad to continue to check the dollar’s strength from accelerating at the pace seen earlier this year and last year.

We look for the economy in Europe to improve gradually as the effects of QE in that region take hold and influence decision makers in business and consumers.

Some moderation in the strength of the dollar is likely to have a positive effect on the competiveness of U.S. multinationals and earnings in the quarters ahead.

Foreign central bank acknowledgement of deflationary risk and subsequent risks to reflation favor an environment in which yields will get to normalize at a slower pace than many expect.

Accommodative monetary policies and vigilance against signs of disinflation and deflation remain a key global dynamic.

Inflation is not the issue, but rather systemic tendencies toward disinflation and deflation. Reflation remains the goal of most central banks.

As we suggested last month, one bad month in the non-farm payroll number did not set a trend. April’s 223,000 jobs added – even as March was revised lower from 165,00 to 85,000 – managed to keep 12 out of the last 13 reports above the key 200,000 average jobs-added mark.

Progress not perfection remains the order of the day as economies from East to West remain committed to persevere in a period of multiple transitions tied to labor, technology and increased challenges on the geopolitical front.

  Stay tuned.

 

Important Disclosures and Certifications

1. Standard and Poor’s Midcap 400 Index is a capitalization-weighted index that measures the performance of the mid-range sector of the U.S. stock market.　 To be included in the index, a stock must have total market capitalization that ranges from roughly $750 million to $3.3 billion.　 The Index was launched on June 19, 1991.　
   
   
2. Russell 2000 Index is a capitalization-weighted index comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.　 The index was developed with a base value of 135.00 as of 12/31/1986.　
   
   
3. MSCI EAFE Index is a free-float weighted equity index consisting of developed nation stocks on Europe, Australasia, and the Far East.　 The index is market-capitalization weighted　 and includes a selection of stocks from 21 developed markets, but excludes those from the U.S. and Canada.　 The index has been calculated since December 31, 1969.　
   
   
4. MSCI Emerging Markets is a free-float weighted equity index that captures large and mid cap representation across 23 Emerging Markets (EM) countries.　 With 835 constituents currently, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
   
   　
5. The DXY index is a measure of the general international value of the U.S. dollar relative to a basket of U.S. trade partners’ currencies.　 It is a weighted geometric mean of the dollar’s value relative to the euro, yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc.
   
   
6. WTI- West Texas Intermediate, also known as Texas light sweet crude, a grade of crude oil that is a benchmark in oil pricing for U.S. domestic consumption.　

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