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With the end of March came yet again another month of swinging volatility in the stock market. The S&P 500 ended -1.58% and the US Aggregate bond index ended up 0.46%, meaning a balanced portfolio of 60/40 stocks/bonds would have ended up just over three-quarters percent loss1. Some of the headline news was the slow-down in our economic growth, continued strong dollar, continued downward pressure on oil prices…pretty much the same information the market has known for a while now.
With the FOMC (Federal Open Market Committee) meeting and press conference on March 18 and 19 came probably the loudest noise of the month, with Janet Yellen and the gang taking the word “Patience” out of the minutes, yet turning around and assuring the public that patience was still being taken. While very confusing, it was more of the same signal that while many hawks (rate-hike support) wanted the Fed to increase rates in June, there was enough dovish sentiment (rate-hike opposition) to make the realistic timeframe for a rate hike to be much later in the year (or in my initial estimations, pushed to next year). In fact Good Friday’s jobs report coming in much lower than estimates, probably added the dovish trend to the Fed.
Earnings reports have been in a bit of a stall for the first quarter. The stall is no doubt a direct result of the drop in oil prices and the strengthening of the US dollar. The oil price drop has caused the energy sector to experience much lower earnings than its first quarter comparison of 2014. The fact that 35-40% of the S&P 500 revenue comes from overseas, a strengthening US dollar acts as a headwind to those revenues and thus creates extra downward pressure on earnings2. According to our broker/dealer, LPL Financial’s Weekly Market Commentary on March 30th, 2015 the strength of the US dollar caused roughly a 3% drag to the S&P 500 earnings report during the 4th Quarter of last year, and the estimation is that the year over year drag for the 1st Quarter of 2015 could be as high as 6%2. All this however is known by the market and shouldn’t be of any surprise when earnings reports begin to surface in the coming weeks.
Our US economy is continuing to expand, however at a slower rate, due to the 2 factors above (oil and US dollar) and many sectors like construction, manufacturing and retail are seeing revenues drop because of another bitter winter season3. As a result, economists like Michael Feroli (JPMorgan) and other macroeconomists lowered their 1st quarter forecast, and this before the bad jobs report3.
The stronger dollar (contributing to US purchases overseas) and new stimulus packages in foreign developed countries (easing policy and stimulating growth) have caused foreign investments to become a bit more popular this month. Our own growth-models added exposure to European developed markets this last month while putting a hedge on the strengthening of the dollar. While we believe the US is still the strongest economy (just look at 1.91% 10-yr US Treasury vs. 0.18% 10-yr German Bund4) there is becoming more and more opportunity outside of the US. We continue to have a very high overweight to US stocks – especially given that 35-40% of revenue from S&P 500 companies are already derived from outside the US2.
We continue to monitor the changing economic and market environments to help guide you through the roller coaster swings that we will continue to expect throughout the year. As always if you have questions about your portfolios with us or if you would like us to look at your portfolios elsewhere we are here for you and welcome your call.
I hope you are enjoying the warmer weather and the release of cabin fever that plagued the 1st Quarter.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in the article may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk, including the loss of principal.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
1 Source: Morningstar Office report
2 LPL Financial Weekly Market Commentary (March 30,2015)
3 Bloomberg Business Report (http://www.bloomberg.com/news/articles/2015-03-27/economy-in-u-s-expanded-at-2-2-pace-in-fourth-quarter)
4 As of April 7th. Source: Bloomberg.com