Economic Update

• It was a light week for economic data domestically, and little new geopolitical news.
• Equity markets sold off on the week, helped in no way by the troubles of the second largest bank in Portugal, which was having trouble rolling over its debt.  In the risk-off environment, bonds gained.

Stocks were largely negative on the week, as a lack of positive data and a scare in Portugal.  From a sector standpoint utilities and consumer staples outperformed, while energy and financials lagged.  Small caps were hit especially hard in a risk-off week.

The second quarter earnings season is set to begin, and expectations remain tempered, but positive.  The number of negative EPS preannouncements has been shrinking, while the number of positive preannouncements has been rising (although the number of negative still outnumber positive).  Strength in expectations appears to be coming from info tech, health care and industrials/materials, while consumer discretionary and financial stocks appear to be weaker going into the reporting period.

At the same time, the bulk of the ten S&P sectors are expected to have better earnings results than in the 1^st quarter, which were brought down by weather effects in line with the broader economy.  All-in-all, expectations for index earnings growth hover around 5% (9% year-over-year) with revenue growth of 5% year-over-year.  Profit margins remain high, so those will also be likely watched quite closely.  That doesn’t necessarily mean a terrible outcome for return on equity, though, as the slack could be picked up by leverage or sales turnover—the latter of which is at currently very low historical levels and could certainly be improved as economic growth picks up.

Foreign emerging markets were only down a fraction of a percent, led by gains in Indonesia, Turkey and Brazil (and Argentina, perhaps helped by World Cup success).  Developed markets were down a significantly larger amount thanks to peripheral Europe, specifically a -10% loss in Portugal.  Investors were spooked a bit by the rumors that Portugal’s second largest bank, Banco Espirito Santo, was on the path to filing for insolvency by not being able to roll over its debt.  Interestingly, while stocks moved backward on the news, credit markets (who would presumably be more sensitive to such news) didn’t move as much.

Bonds gained on a flight to quality, and falling yields on the order of a tenth of a percent.  The best-performing segments were long government bonds, unsurprisingly, while European core and Japanese debt was also higher on the overall flight to quality.  Floating rate, high yield and peripheral Europe sold off a bit on the week.

Real estate returns were led by a strongly positive week in U.S. retail and residential, while industrial/office also bucked the trend of other equities by rising a bit.  Europe lost a few percent on the week, ending up in last place.

Commodities were generally lower on the week by several percent.  Precious and industrial metals bucked the trend by gaining a few percent on the week—gold has performed a bit better as of late, with the geopolitical flare-ups and again lower real yields in fixed income.  Industrial metals have also moved higher, with better PMI strength around the world providing a boost for materials.  Coffee and grains were significantly lower (as in more than -5%)—both have seen a bit of a correction as a stronger coffee harvest in Brazil better grain crop estimates in the U.S. have led to better supply balances, and lower scarcity fears.  By the way, in other mundane commodities news, the well-known Dow Jones-UBS (formerly DJ-AIG) index has changed sponsorship yet again—now, it is being referred to as the Bloomberg Commodities Index.

Sources:  LSA Portfolio Analytics, 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.