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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Weekly Economic Update

Posted on June 9, 2014 by LSAConnect

Economic Update:

  • Featured by an unusual correction in the manufacturing ISM, economic data for the week was decent.  The more dramatic news came from Europe, where the ECB provided additional easing and elected a new ‘negative interest rate’ policy, the first of its kind for a major central bank.
  • Equity markets generally rose across the board on positive economic data in the U.S. and ECB easing; this was coincident with higher U.S. interest rates.

Stocks experienced a bullish week and new S&P 500 highs due to better economic data, positive payrolls and the ECB easing all noted above.  Domestically, industrials and financials led from a sector standpoint, while telecom lagged as the only negative performing area.  Higher-beta small-caps beat large-caps, in keeping with the stronger sentiment.  That pulled small-caps out of their negative year-to-date position. Continue reading →

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Weekly Economic Update

Posted on June 2, 2014 by LSAConnect

Economic Update:

  • Economic data looked a bit better, as winter weather problems continue to dissipate towards more normal ordering and manufacturing conditions.  However, some data remains lackluster (GDP for the first quarter was revised down into negative territory).  The ECB stands poised to ease to stem deflation fears and spur economic growth.
  • Markets reached new all-time highs again, as large-caps outperformed small-caps.  Bonds also gained as interest rates fell to their lowest levels in months.

U.S. stocks experienced a generally flat-to-slightly positive week, as the S&P set a new all-time high again.  From a sector standpoint, defensive utilities and consumer staples outperformed, while consumer discretionary and industrials lagged by gaining just under a percent.  While all market caps were sharply higher, large-caps outperformed small-caps again and the Russell remains in negative territory on the year.

In foreign markets, Europe and Japan gained a percent and a half while the U.K. was flat.  In Japan, business confidence and employment have improved, demonstrating that the recent sales tax increase may not have been as damaging as first feared.  European peripherals such as Italy and Spain performed well, in light of an upcoming ECB meeting where expectations are for an easing of monetary conditions.  German unemployment rose by 25k, which was higher than expected, but didn’t excessively weigh due to the upcoming policy meetings. Continue reading →

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Weekly Economic Update

Posted on May 28, 2014 by LSAConnect

Economic Update

  • Stronger reading in May’s preliminary Market PMI index brought optimism to the second half of this year.
  • Housing sales data were mixed: New home sales rebounded in April after two months of declines; and existing house sales were up less than expected, staying well below the unit level in April 2013.
  • Initial jobless claims came in weaker than the consensus expectation with a small improvement for the 4-week moving average and continuing claims.
  • U.S. tech and small cap stocks helped the market approach an all-time high before the long Memorial Day weekend.

Heading into Memorial Day weekend, U.S. equity markets were led higher by technology and small cap stocks.  Small cap stocks outperformed mid cap and large cap stocks.  Cyclical and economic sensitive sectors beat defensive sectors.  Technology, consumer cyclical and financial sectors led the market, all generating north of a 1.5% return, while utilities, consumer defensive and telecom sectors lagged.  In general, growth-style outperformed value-style.

Outside the U.S., international developed stocks underperformed U.S. and emerging market stocks.  The MSCI Europe index lagged the MSCI Pacific index by 55 bps for the week.

Continue reading →

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Portfolio Manager Commentary

Posted on May 20, 2014 by LSAConnect

Portfolio Manager Commentary: Short Duration Credit

May 15, 2014

Robert A. Lee  Partner & Director of Taxable Fixed Income

Andrew H. O’Brien, CFA  Partner, Portfolio Manager

 Lord Abbett Partners Rob Lee and Andy O’Brien talk about the trends that are affecting fixed-income markets, and how they are positioning their portfolio now.

https://www.lordabbett.com/en/perspectives/fixedincomeinsights/portfolio-update-short-duration-credit-video.html

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Weekly Economic Update

Posted on May 19, 2014 by LSAConnect

Economic Update:

  • Economic numbers were mixed, with April figures like retail sales lower, but regional Fed surveys for May showing a bit more promise.  Inflation in CPI/PPI was higher than expected, with food price and housing increases being the primary drivers.
  • Markets were mixed, but small cap stocks have suffered in the last two months.  Bond continued to rally as treasury yields have hit the lowest levels in several months.

The more notable consumer price index for April rose +0.3%, which was on par with forecast; the core number was roughly twice expectations at +0.2%.  That took the year-over-year gain in CPI for the headline and core measures to +2.0% and 1.8%, respectively.  The headline portion was heavily influenced by its differentiating components of food and energy, as both were several tenths of a percent higher; the core portion was led by +1% higher transportation prices, which in itself was broken out into gains in both airline tickets and used cars (you think it would be more substantial than these types of things).  Rent of primary residence and owners’ equivalent rent were both a third of a percent higher, which added to underlying upward pressure.

We list the inflation metrics as somewhat neutral in terms of impact, since they are good and bad.  No one wants to see too much inflation begin to emerge, as that has economic consequences, but having some is a byproduct of growth.  The higher food price component is often weather-related and typically self-correcting over time, so not as worrisome, at least in wealthier developed economies that can handle that strain relative to emerging nations, where a higher percentage of household budgets are dedicated to food spending. Continue reading →

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MainStay Marketfield Update

Posted on May 19, 2014 by LSAConnect

mainstay

The 75 day performance of Marketfield has generated some questions.  As I write this, MFLDX is down 6.10% YTD. These results, though disappointing, are believed to be short term in nature by the team.  I genuinely appreciate your past support, and want to make sure that I am visible and available when times are good, and when times are not so good. Over the next several weeks, I will be allocating time every day to conduct conference calls and meet in person when I am able.  I have attached some resources to assist with understanding our past and present positioning.

First and foremost, fund AUM (~$20B) has had no impact on performance as per Michael Aronstein.  The underperformance is attributable to the posturing of the portfolio toward economically sensitive holdings.  Michael Aronstein has publicly shared their macro views, portfolio positioning and performance in the past two monthly commentaries and quarterly conference call .  Defensive sectors in equities and high quality fixed income have performed well which is contrary to their intermediate outlook and positioning.  The pullback in Japan and economically sensitive sectors that do well in an expansionary economic cycle have underperformed and is therefore, reflected in fund performance. Continue reading →

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