Weekly Economic Update

Posted on August 11, 2014 by LSAConnect
  • Economic data reports for the week were relatively good, led by ISM non-manufacturing, factory orders and the Fed’s Senior Loan Officer Survey showing positive results.
  • Stocks experienced a more volatile week as events in the Ukraine raised anxiety again, which dissipated by the end of the week with net small positive effect in the U.S., although it weighed on foreign equities. Bonds performed well with safe haven rates falling, while some riskier foreign issues sold off a bit.

Markets were negatively affected early in the week, due to again increased tensions in the Ukraine, and comments from Poland’s Prime Minister about the situation, but equities recovered some losses by Friday as Russian military exercises ended—U.S. equities were actually in the black.  Small-cap stocks bucked the trend of late by posting stronger returns than large-caps; some of the valuation premium had been trimmed during the last several weeks of poor performance, but it’s still present.  From a sector perspective, consumer discretionary and materials outperformed while telecom lagged by dropping several percent on the week (although telecom is a tiny sector, with results impacted by Sprint’s extreme price drop after deciding to not pursue T-Mobile).

From its peak on July 24, the S&P has pared back by just under -3%, although it has certainly felt like more, with volatility (measuring by VIX) rising up from lows around 10 at that time to 16 last week.  Then again, as we’ve previously discussed, the VIX offers a fairly limited view on things, as a week of +/- 1% daily changes is certainly more volatile than one with a series of +/- 0.25% changes—although the net result could be exactly the same. Continue reading →

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Weekly Economic Update

Posted on August 4, 2014 by LSAConnect
  • A jam-packed week of economic data releases boosted by a faster Q2 real GDP growth rate, a stronger ISM manufacturing reading in July and upbeat consumer confidence levels.
  • Weaker housing sales data in June, and in-line results for July’s payroll numbers and June’s personal income and consumption data.
  • No major surprises from last week’s FOMC meeting with another asset purchase reduction of $10 billion each month; Philadelphia Fed President Charles Plosser voted against the guidance language about rates being on hold for “a considerable time after the asset purchase program ends.”
  • Initial jobless claims came in softer than the consensus expectation with a small improvement for the 4-week moving average and slightly higher continuing claims.
  • U.S. equity markets pulled back at the end of the week in reaction to the ongoing geo-political tension in Eastern Europe and the Middle East plus fears of uncertainty after the expected end of the Fed’s QE3 in October.

Despite a strong U.S. Q2 GDP report and several improving economic data, financial markets took a downturn at the end of the week after no major surprises from last week’s FOMC meeting.  As expected, the Fed kept the short-term rate at 0.25% while reducing its asset purchases by another $10 billion to a total of $25 billion starting in August.  U.S. equity markets sold off across the board.  Small cap stocks were deeper into the red zone for the year-to-date performance.  Defensive sectors fared better.  Telecom, healthcare, consumer discretionary and utilities sectors outperformed energy, industrials and financials in the S&P 500 index. Continue reading →

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Fed Note

Posted on July 31, 2014 by LSAConnect

Fed Note:

The Federal Reserve met today and proceeded according to the recent plan.  The taper continued, with Treasury/MBS purchases being wound down from $35 bil./mo. to $25 bil./mo.  At this pace, QE Fed buys should end by October.  Other comments made in the release alluded to economic strengthening, relative to the difficult winter especially, labor market improvement, but continued frustrations in housing, which has lagged it’s normal point in previous modern recoveries.  Interestingly, Philadelphia Fed Pres. Charles Plosser voted against the guidance language alluding to a low Fed Funds rate for a ‘considerable time’ after QE ends, as time-dependent and not helpful considering the better conditions.

On to the decision factors and where they stand: Continue reading →

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Weekly Economic Update

Posted on July 28, 2014 by LSAConnect

Economic Update:

  • Economic data was mostly focused on inflation and housing: CPI was up marginally, while housing stats were mixed—remaining below trend for an economic recovery.
  • Stock markets were a mixed bag, with larger-cap stocks performing a bit better than small cap, although very sector-dependent. Bonds were mixed as well, due to a flattening of the yield curve on the week.

Stocks were mixed on the week, with inflation coming in at a tempered rate, earnings season continuing.  Large-caps generally outperformed small-caps, which are negative year-to-date.  Sectors leading the way were energy and tech, up nearly a percent, while consumer staples and discretionary stocks lagged with negative results.

Developed market stocks in the U.K., Europe and Japan were little changed on net during the week, but peripheral Europe proved to be the winners.  Emerging markets experienced a solid week, with China leading the way—Chinese flash PMI from HSBC was stronger than expected, at 52, a 18-month high.

Indonesian markets have experienced a double-digit month with the election of a pro-reform advocate.  Hopes are similar to those of India, in that business-minded leadership will result in better ties to developed markets and more certainty in policy (as opposed to arbitrary, short-term political agenda-driven decisions emerging market nations are sometimes notorious for).  On the negative side, Russian stocks suffered on additional questions and tension with Ukraine, as well as a central bank 0.50% interest rate hike designed to bring some currency stability and reduce inflation risks amidst international sanctions. Continue reading →

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Second Quarter 2014 LSA Economic Update

Posted on July 22, 2014 by LSAConnect

Second Quarter LSA Economic Update

July 22nd, 2014

second quarter update

LSA has posted the 2Q14 Economic update report.  Here were some of the high level thoughts:

Continue reading →

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Weekly Economic Update

Posted on July 22, 2014 by LSAConnect

Economic Update

  • Economic data was mixed to positive on the week, with solid results in some portions of retail sales, as well as the Empire and Philly Fed surveys; while other data, such as housing starts and sentiment, lagged a bit.
  • Markets were relatively flat most of the week, until the Ukrainian plane crash put markets into a tailspin Thursday—that righted itself again to the upside by the week’s end.  Revenues and earnings for U.S. equities have surprised on the upside so far.

A subdued market week was shattered on Thursday with the airline crash in the Ukraine as well as a military offensive in Israel/Gaza, which caused the worst drop in two months (albeit ‘only’ -1%), although conditions improved Friday to bring returns back to a net positive.  From an industry standpoint, technology and financials outperformed, gaining over a percent, while health care and telecom lagged with marginal losses.  Small-cap stocks suffered a bit in the midst of comments from Janet Yellen in regard to perceptions of their overvaluation (you can’t say we didn’t warn you before now).

U.S. equities were in the midst of the 2nd quarter earnings season, which so far has been good.  In the S&P, with a quarter of companies reporting so far, ¾ have topped street earnings estimates.  Revenues are also coming in above average, with a similar ¾ of firms coming in ahead of expectations and by a wider margin than expected.

Internationally, developed and emerging markets on performed roughly in line on net.  Individually, Japanese stocks gained a percent and a half, with the U.K. roughly half that and Europe just a marginal increase.  Strength in several emerging nations, namely Turkey and Brazil, outweighed -5% losses in Russia following the Ukrainian plane crash with potential Russian connections.  Chinese GDP for the 2nd quarter was a tenth or two higher than expected, coming at 7.5%, boosting stock prices and hopes. Continue reading →

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Weekly Economic Update

Posted on July 14, 2014 by LSAConnect

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 1st 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. Continue reading →

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Weekly Economic Update

Posted on July 7, 2014 by LSAConnect

Economic Update

 

  • Economic data was mixed early in the short week, but several industrial indicators remained in positive territory and the Friday employment report boosted investor spirits.
  • Stock markets gained on par with stronger sentiment.  In line with this expected strength, bond yields rose sharply, creating a bad week for fixed income.

In a four-day trading week, U.S. stocks continued their upward movement, with the Dow reaching the round 17,000 level—so no doubt extra media attention than usual.  The S&P is also near a round 2,000 level, which would continue to generate headlines and perhaps more retail investor interest.  It’s often easy to forget that the majority of Americans don’t track the investment markets on a daily basis like many of us do, so are only reminded of their success or lack thereof by their mention on the news.

From a sector standpoint, cyclical sectors technology and consumer discretionary outperformed, while utilities and energy underperformed.  In coming weeks, we’ll talk a bit more current market levels and valuation (hint:  valuation remains ‘fair,’ while sentiment has started to improve with these headline numbers being reached, although not to the level where investors seem excited about stocks.)

Outside the U.S., returns between developed and emerging markets were generally indistinguishable on the week.  In developed nations, U.K. led with 2% gains, while Europe and Japan were closer around the EAFE average, which was brought down overall by Australia.  Overall, foreign returns from China and India led, up 3-4%, while the lowest returns came from Brazil/Latin America and Turkey; the latter was due to higher-than-expected inflation, no doubt due to the proximity to Iraq, as well as some odd comments from the prime minister that puts to question the level of objectivity of the central bank (we only mention these details as they highlight the country-specific ‘quirks’ some emerging markets struggle with).  The Chinese purchasing managers’ index gained for the second straight month (now at 52.4), which spurred sentiment.  European PMI fell a bit last month, but remained in expansionary territory. Continue reading →

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Weekly Economic Update

Posted on June 30, 2014 by LSAConnect

Economic Update:

  • Economic data was mixed, but survey responses showed stronger positive sentiment and housing appears to show some improvement.  The final 1st Quarter GDP release was amended downward, but this was largely blamed on weather effects and appears to be reversing for the current quarter.
  • Equity returns were generally negative on the week, as the negative GDP report and Iraq situation weighed on sentiment.  In more typical risk-off fashion, bond returns were higher on lower yields across the globe.

The markets fell a bit on the week in a summertime lull, of lower volume and minimal volatility (see above).  Consumer discretionary and utilities were the strongest performing sectors with gains of a percent, while consumer staples and industrials brought up the rear, losing a percent each.

Internationally, emerging market stocks eked out a small gain, including China/SE Asia and Russia, the former conducting a bit of indirect financial easing (through lack of expected restrictive activity) and the latter due to additional lightened Ukrainian pressures.  Developed nations lost ground on average—Europe and the U.K. faring the worst.  Despite the Bank of England keeping rates unchanged/low, fears of an eventual increase sooner than expected weighed on sentiment, as did weaker European PMI results (albeit still positive).

Bonds gained solidly on the week, with yields falling 5-10 basis points across the curve, resulting in one percent gains for long Treasuries.  High yield and floating rate were weaker on the week. Continue reading →

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Weekly Economic Update

Posted on June 23, 2014 by LSAConnect

Economic Update:

  • A very busy week boosted by stronger manufacturing reports from the Northeast region, better industrial production and tighter capacity utilization.
  • Housing sales data were mixed: better sentiments from builders this month but weaker monthly housing starts and building permits in May.
  • The headline CPI rose slightly faster than the consensus view in May; the 12-month increase surpassed 2% for the first time since late 2012.
  • Initial jobless claims came in better than the consensus expectation with a small improvement for the 4-week moving average and lower continuing claims.
  • U.S. equity markets rallied to record highs after the Fed reaffirmed its stance of keeping rates low for a prolonged period.

Despite potential escalating risks in Iraq and spill-over impact in the Middle-East, financial markets rallied after no major surprises from last week’s FOMC meeting.  As expected, the Fed kept the short-term rate at 0.25% while reducing its asset purchases by another $10 billion to total of $35 billion starting in July.  U.S. equity markets were led higher by small cap stocks, which outperformed both mid cap and large cap stocks for the week, but lagged for the year-to-date.  The utility, healthcare, and energy sectors led the market – all generating north of a 2% return – while technology, telecom, and consumer cyclical sectors lagged.  In general, defensive sectors beat sensitive and cyclical sectors.

Outside the U.S., international developed stocks underperformed U.S. stocks.  The Thomson Reuters/INSEAD Asia Business Sentiment Index registered a two-year high in the second quarter, suggesting a better Asian economic outlook.  The MSCI Pacific index beat the MSCI Europe index by 43 bps for the week, but underperformed by 3.6% for the year-to-date.  Within the emerging markets, the MSCI BRIC index lost 81 bps, 31 bps behind the MSCI EM index.  The Latin America region as a whole outperformed emerging countries in Europe and Asia.

BarCap U.S. Aggregate Bond index was up only by 4 bps last week.  With no major surprises from the Fed’s meeting, the U.S. 10-year Treasury yield edged up 3 bps to 2.63% from a week ago.  The Fed’s real GDP growth projection was lowered to 2.2% from a previous 2.9% for 2014, after factoring into a weaker Q1 economic result. Continue reading →

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FED NOTE

Posted on June 18, 2014 by LSAConnect

Fed Note:

The FOMC concluded their June meeting today, again with little fanfare or surprise.  The tapering process of winding down stimulative treasury/mortgage bond purchases will continue at a rate of an additional $10 billion/mo., which will bring overall purchases down to a level of $35 bil./mo.  That part came as no surprise, since jobs data, as well as several economic data points, have moved more solidly positive as a stagnant winter has been replaced by a more productive spring.  Now, the committee is left (as are markets) to determine how much of that transformation is due to pent-up demand from the rough winter compared to how much is a result of improving core demand in the economy.

Other comments were focused around improved levels of growth, noting recovery from the severe winter.  Consumer and business spending resumed their advance.  Housing remains an area of concern; detail wasn’t mentioned, but existing home sales pricing remains high in some areas but new building demand has been sluggish.

Economic growth.  This meeting featured revised data estimates for 2014 and the next several years, with the FOMC looking a bit more optimistic on 2015 and 2016.  The GDP estimate for 2014 was taken down a few notches from the initial 2.9% to 2.2%.  Obviously the -1% result from Q1 put a wrench in their overall plans for possible higher growth this year and even three exceptional remaining quarters wouldn’t be strong enough to fill the large gap. Continue reading →

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Weekly Economic Update

Posted on June 17, 2014 by LSAConnect

Economic Update

  • In a slow week for economic data, stats like retail sales were weaker, but PPI also came in flat, which appeared to temper core inflation concerns from prior weeks.
  • Equity markets were largely off, due to increased concerns about violence and possible military action in Iraq and skepticism about European stimulus.

Stocks fell on the week, with small-caps losing a bit less than large-caps.  Industry results were led by energy and technology, while consumer discretionary and industrials lagged.  This came alongside increased tensions in Iraq as rebels took control of two key Northern cities.  Obviously, the ramifications are in the spectrum of:  What will be the U.S. involvement if any (undecided, but seems likely at some level)?  What will it do to energy costs (a bit higher so far, and intensification of violence would pressure the per barrel price of crude upward)?  Will it spread regionally (the wildcard and biggest fear in that part of the world for most investors)?  If oil prices do rise for an extended period, how much of a negative impact will that have on consumer behavior/spending?

There were also several mergers/acquisitions during the week, involving Tyson Foods/Hillshire Brands, as well as Merck and Priceline buying what are hoped to be complimentary business lines.  The prices paid in a few cases appear to be at significant premiums to fair value/current market, which signifies optimism for both the prospects of the target firm and/or the underlying economy’s ability to support these prospects. Continue reading →

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