Market Commentary: Market Recap

    Market Update for the Month Ending February 28, 2015

    Markets heat up . . .
    After a difficult January, financial markets rebounded in February. The Dow Jones Industrial Average was up 6.01 percent, the S&P 500 Index climbed 5.75 percent, and the Nasdaq rose 7.08 percent. All major U.S. indices are now in positive territory for the year.

    Several factors drove February’s strong performance. Despite the effects of low oil prices on energy companies and the strong dollar on multinationals, 76 percent of S&P 500 companies reported earnings above estimates. Moreover, earnings growth rates were up to 3.7 percent by month-end—above the 1.7-percent figure estimated at the end of 2014, per FactSet.

    Sales increases were also better than expected, and eight of ten sectors reported revenue growth for fourth-quarter 2014. Sales data reflects actual customer demand, and higher sales-growth rates support the prospect of future earnings growth.

    Technically, the markets returned to healthy territory in February. Coupled with improving fundamentals, this suggests that market risks are not at high levels for the near term.

    Developed international markets also performed well in February, with the MSCI EAFE Index up 5.98 percent. The MSCI Emerging Markets Index was up 2.98 percent.

    Fixed income was down in February, with the Barclays Capital Aggregate Bond Index declining 0.94 percent. The loss was driven by higher bond yields. High-yield bonds returned a respectable 2.41 percent, according to the Barclays Capital U.S. Corporate High Yield Index.

    . . . Even as U.S. economy suffers from severe winter weather
    Severe winter weather resulted in a slowdown in the housing sector and in retail sales, while economic weakness elsewhere in the world slowed factory orders and manufacturing sentiment, much as we saw in 2014. Unlike 2014, however, employment grew, as did average hourly earnings. The unemployment rate increased slightly in January, from 5.6 percent to 5.7 percent, but this was due to more people moving back into the labor force, which is a positive trend (see chart). Strong employment data was supported by strong growth in consumer spending, which is at its highest level since 2006.

    Percentage of Total Working Age U.S. Population Employed,
    January 2007–January 2015

    Percentage of Total Working Age U.S. Population Employed

    But there are signs that growth has slowed from the pace of late 2014. The gain in gross domestic product growth for the fourth quarter was revised down, from 2.6 percent to 2.2 percent, largely due to lower-than-estimated additions to firms’ inventory and reduced exports.

    Global recovery continues but may be slowing
    China’s economy continued to grow at lower than historical levels, and the Chinese government continued to increase stimulus. China’s currency, managed by the government, has shown patterns of decline, raising concerns about political conflicts and capital flight.

    Though Europe continued to stabilize, with Germany showing signs of continuing growth, the big concern in February was the confrontation between the new Greek government and the financial institutions underwriting the Greek economy. At month-end, a temporary agreement had been reached, though its implementation will be extremely difficult.

    Politics threatens markets
    Even as economies return to growth, politics remains a risk factor. Euroskeptic parties are gaining support across the eurozone, and major emerging markets, such as Turkey and Brazil, not to mention Venezuela and Argentina, continue to suffer economic and political turmoil.
    Most relevant of all is the move by Russia to cement its gains in eastern Ukraine—and there are rumors that it may extend its Ukrainian tactics to the Baltics.

    Enjoy the gains but don’t be surprised by volatility
    February’s market recovery was a relief, but some weak U.S. economic reports highlight that risks remain. Although we expect the U.S. economy to continue to grow, this is by no means guaranteed.

    In Europe, the economy is on the mend, but politics could cause a rocky summer. China is trying to spin up its export machine to compensate for weakness in other areas, but this could spark trade disputes. In short, uncertainty remains.

    Therefore, despite the strong market results for February, we believe that it is important to maintain a disciplined investment process. Through good times and bad, this is the key to achieving long-term financial goals.

    All information according to Bloomberg, unless stated otherwise.

    Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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