Economic Update 4-27-2015

• In a light week for economic releases, durable goods came in somewhat better than expected, led by aircraft orders, while housing also showed some mixed signs of life.  Housing has been sporadic over the last few years, which has concerned economists, although the spring season will no doubt bring more information and clarity.

• Equity markets worldwide gained on the week, with earnings coming in a bit better than expected.  Interest rates also rose, which ended up being a negative for government bonds; corporate and emerging market debt fared better.  Commodities rose with help from a weaker dollar and higher oil prices.

U.S. stocks gained ground, with large-caps outperforming small-caps.  Technology was the most successful sector, gaining +4%, followed by telecom and consumer cyclicals, while energy and consumer staples gained minimally.  Tech leaders Google and Microsoft were in the spotlight, while retailing was especially strong on the week, led by Amazon’s strong revenue growth from their web services unit—closely watched due to its cloud-based potentially disruptive-to-traditional-business-model activities.  These new paradigms are scary to traditional business models, and while success in profitability terms is yet to be consistently proven in some of these areas, business model life cycles are moving at a faster and faster pace.

Earnings for the first quarter have come in for almost half the firms in the S&P 500, and 3/4 of these have been above their mean estimate—amazingly, on target with the average proportion over the past five years.  Just under 1/2 of firms have reported positive surprises for revenues, which is also in keeping with recent trends but below the five-year average of just under 60%.  However, expectations for the next several quarter continue to be reduced in keeping with dollar strength and slow growth—with carryover from low energy pricing for energy firms leading the way. Earnings cycles have become generally predictable, due to the lowering/raising of earnings estimates far in advance of actual releases.

Internationally, developed markets outperformed emerging generally.  The problem children of Greece and Brazil experienced the strongest equity gains, as did Russia, which was helped by stronger oil pricing.  In Greece, a government decree requiring state bodies to deposit their available cash at the central bank pushed off fears of an early May default for the time being, although these negotiations remain in the headlines with little headway made—at least in public.  Surveys showing an improvement in Germany’s business climate helped sentiment somewhat, although European and Japanese equities gained at roughly the same pace.  India was left behind with sharp declines, in a continued 2015 reversal of 2014’s strength, as worries over sporadic corporate earnings, taxes on foreign investors and weak government spending have outweighed political hopes and dreams from Prime Minister Modi’s election last year.

Chinese stocks, which are a bifurcated sort, due to the unique dynamics of global Hong Kong ‘H’ vs. locally-dominated Shanghai/Shenzhen ‘A’ shares, continued to ascend.  The prior week, the Chinese lowered central bank reserve rates, and last week announced an injection of over $60 billion into state-run policy banks—the Export-Import Bank and China Development Bank—through loans in order to essentially recapitalize them.  These easing moves, expectations for continued targeted easing to prevent the slowdown from becoming too widespread and general domestic euphoria for the relatively new Chinese hobby of speculative stock investing have driven shares dramatically higher.  In their domestic market, some classic red flags are beginning to emerge, including rising margin balances, and the fact that 2/3 of new trading accounts this year have been opened by those who never finished secondary school—which traditionally had been a small proportion of the investor pool.  This mania is truly becoming a societal phenomenon, and it will be interesting to see the Chinese government’s continued work in attempting to police and or prop it.  With an embedded focus on societal harmony, avoiding negative outcomes is likely to be a primary goal.

Interestingly, Lipper reported that U.S. equity mutual funds experienced their 12^th straight week of redemptions ($1.8 bil. last week alone), while international funds were the continued recipient of inflows.  This is no surprise, considering the stronger performance from foreign equities so far this year, which perhaps help explain why phenomena such as the momentum effect continue to persist and help to perpetuate performance trends.

U.S. bond prices were weaker upon risk-on sentiment and associated higher rates—most pronounced in the longer-duration area.  European bonds also lost some ground in local terms, some of which was offset in a small decline in the dollar during the week.  U.S. high yield, bank loans and emerging market debt ended up with positive returns for the period—bucking the trend of higher-quality debt.

Real estate in the U.S. gained about a percent, falling just short of equities, with residential/apartments returning about twice that.  European REITs rose just shy of a percent, while Japanese real estate lost a percent, bucking the Asian trend last week.  Typically, real estate has sold off a bit upon higher interest rates, but this proved to be an exception.

Commodities came in higher, as measured by the GSCI, helped by the dollar being weaker by a half-percent or so.  Cotton and nickel were big performers as reports of stronger global demand boosted interest in both.  WTI crude bounced around in a tight range during over the week, ending just above $57, while Brent crude experienced higher percentage gains than that.  Interestingly, in almost half of trading days so far this year, oil prices have moved by +/- 3%, with a mixture of up- and down-days, as opposed to mostly the down variety in latter 2014.  Precious metals were the losing segment, as investors were clearly taking advantage of ‘risk-on’ sentiment, during which gold doesn’t generally participate.

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.