Market Commentary: Market Recap

Market Update for the Month Ending April 30, 2016

Most markets rise, but . . .
April was a mixed month for stock markets. The Dow Jones Industrial Average and S&P 500 Index were up 0.62 percent and 0.39 percent, respectively, though the Nasdaq fell 1.89 percent. The mixed results reflect declines toward month–end, as all three measures had been up around 2 percent at mid–month. The late drop appeared to have been driven by concerns about technology companies and particularly a surprise revenue downturn at Apple.

The positive results for the Dow and S&P 500 owed a great deal to better–than–expected corporate earnings for the first quarter announced in April. Estimates had been revised sharply downward, but actual earnings surprised to the upside, decreasing 7.6 percent. Even though a decline isn't good, previous estimates had anticipated an 8.7–percent earnings drop.

Technical factors remained strong for the Dow and S&P 500, with both staying well above their 200–day moving averages. The Nasdaq, however, broke below this level, suggesting potential weakness.

Developed international markets performed better than U.S. markets. The MSCI EAFE Index was up 2.90 percent, although its year–to–date results remain negative. Results for the MSCI Emerging Markets Index were in line with U.S. markets, as it gained 0.56 percent.

For the fixed income markets, U.S. interest rates ticked up slightly. The 10–year Treasury rose from 1.79 percent to 1.83 percent during April, leading to a 0.38–percent gain for the Barclays Capital Aggregate Bond Index. Corporate high–yield bonds did best, with the Barclays Capital U.S. Corporate High Yield Index rising 3.92 percent.

. . . Spring slow to appear for the economy
Employment numbers for March, released in April, were strong, with 215,000 jobs gained, the Labor Force Participation Rate up to 63 percent, and wage growth rising 0.3 percent. Business sentiment improved, too. The ISM Manufacturing Business Survey moved from contraction to expansion for the first time since last October, and the ISM Non–Manufacturing Business Survey rose after several months of declines.

Consumers, however, continued to worry. Confidence surveys and spending growth stagnated, and retail sales for March, reported in April, were essentially flat. Moreover, positive sentiment notwithstanding, actual business performance remained weak. Factory and durable goods orders for February and March were down, driven by low oil prices and a strong dollar. Fortunately, these headwinds appear to be fading, as seen in Figure 1, though the effects linger. Housing also slowed, with housing starts and new home sales coming in below expectations.

Figure 1. Trade–Weighted Value of U.S. Dollar and Spot Oil Price (WTI $/Barrel), 2013–First Quarter 2016
Figure 1

Economic growth for the first quarter ratified the overall slowdown. The gross domestic product report showed 0.5–percent growth, well below the previous quarter's 1.4 percent and below analyst forecasts of 0.7 percent.

Despite this, longer–term trends appear to be positive. Forward–looking indicators show that faster growth over the next couple of quarters is likely.

International uncertainty remains
Despite slower–than–anticipated growth, the U.S. economy has supported improvement in the rest of the world. Even Europe has returned to growth, though the political environment across the pond continues to deteriorate. Fortunately, markets seem to be paying more attention to the economic improvement.

China, too, is showing signs of both economic improvement and political risk. The government has dialed up its stimulus, and the economy is showing signs of picking up. Political risks include rising activity in the South and East China seas and the anticorruption campaign in China's government.

A new season slowly takes hold
Spring is taking longer to arrive for the U.S. economy than anyone expected. Nevertheless, continued improvements in employment and consumer spending will eventually lead to better growth. Worries remain, but trends appear favorable.

Financial markets reflect both the short–term uncertainty and long–term trends. U.S. market results for April were solid if not spectacular, and company earnings, though down, have been better than expected. Technical indicators are strong for the two most–inclusive indices.

Our stance remains optimistic but with elements of concern about Europe and China. As always, a diversified portfolio constructed around an investor's own risk tolerance and time frame should help achieve goals, regardless of what happens in the interim.

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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