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While April showers (at least in the middle of America) brought May flowers, so the stock and bond markets brought much of the same from last month. The U.S. stock market continued its upward move, posting an additional 1.38%1, while the U. S. bond market continued proving it’s inverse correlation to interest rates, posting a slight negative return (-0.18%)2. A balanced 60/40 stock/bond portfolio of those same indexes would have increased your total allocation by ¾ of a percent (gross return). The main headliners for the month were U.S. jobs reports, the Greek debacle, and 1st Quarter earnings reports.
U.S. jobs continue to improve with the most recent round of surveys showing 280,000 created for the month of May (I’m stealing this from a June 5th report as this Month-In-Review is a few days late), essentially keeping the overall unemployment rate stable at 5.5%3. And while we are now used to seeing great data like this, we are starting to see positive signs coming out of the wage growth, giving us our first signs of hope that the entire labor market will actually improve, rather than just grow. The Bureau of Labor Statistics showed that the average hourly earnings from April 2014 to April 2015 grew by 2.3%.3 It could be expected that as companies like McDonalds and Walmart lift their hourly rates, and as cities like L.A. and St. Louis boast abnormally high minimum-wage increase goals over the coming years, wage growth will finally create a case for the Fed to embark on interest rate hikes. One note of caution is what is termed “Wage Push Inflation” or Wage-Price Spiral” where wage increases create a demand to increase cost of goods and services, which would in turn, create more need for wage increases. We will stay tuned on this matter.
Greece is a mess. We all understand this. In the next 4 months Greece is on schedule to be required to repay around 11.6 billion euros in debt and refinance another 9.2 billion euros. Based on their financial weakness, and on a much more publically discussed exit, it is now very likely that Greece will both default and leave the euro. The impact to the Eurozone and the European markets is less than transparent; however we do know that the European economy is continuing to get stronger and stronger. As well, we will stay tuned on this matter.
Lastly, earnings in the U.S. and abroad have given the markets renewed strength. With over 98% of the S&P 500 companies reporting their 1st Quarter earnings, the expectation is that earnings will have grown at roughly 2.2% year over year. While nothing to knock our socks off, it is much better than the 3% decline that was expected! What’s more, taking energy out of the equation, earnings growth was more like 10.3% year over year, showing the negative impact one sector can have in overall earnings reports. Healthcare and Financials posted the largest two earnings growth rates of 17.5% and 16.1% respectively.4 But while earnings are high (enter: Debbie Downer), the strong dollar has continued to make revenue expectations less than impressive. Revenue growth year over year will be close to -3.1%. Again, taking energy out of the equation, that same revenue number would turn slightly positive.4 So no surprise that the U.S. earnings and revenue reports are feeling the burden of low energy prices. The good news: this is not the case overseas. Europe and Japan are showing positive signs of earnings and revenue growth and lend credence to a globally allocated portfolio.
We continue to watch the markets and the economies and make changes in our models as we see the landscape changing around us. In other words, we’ve got your 6.
1Russell 3000 data taken from Morningstar Office – 05/1/2015 – 05/31/2015
2Barclays U.S. Aggregate Bond Index data taken from Morningstar Office – 05/1/2015 – 05/31/2015
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.