Market Commentary: Market Recap
Market Update for the Month Ending April 30, 2015
Markets do well but . . .
April was a good month for stock markets. Major indices climbed throughout most of the period despite a pullback toward month-end. The Dow Jones Industrial Average was up 0.45 percent for the month, and the S&P 500 Index gained 0.96 percent. The Nasdaq also did well, returning 0.83 percent.
The positive returns for April owed a great deal to better-than-expected corporate earnings. At the end of March, earnings expectations had been revised downward, with a decline of 4.7 percent predicted for the quarter; however, as of April 30, actual earnings for reporting companies had declined only 0.4 percent.
Much of the decline in corporate earnings was due to the energy sector, as eight of the ten sectors actually reported increased earnings growth. Technical factors also showed strength, and all three indices remained well above worry levels.
Developed international markets performed better than U.S. markets, with the MSCI EAFE Index up 4.08 percent, bringing its year-to-date results above U.S. levels. The MSCI Emerging Markets Index was up by even more—7.51 percent for the month.
U.S. interest rates ticked up, with the 10-year U.S. Treasury rate increasing from 1.87 percent to 2.05 percent during April, driving down the Barclays Capital Aggregate Bond Index by 0.36 percent for the month. Longer-duration fixed income securities performed worst, but corporate high-yield bonds did well, as reflected by the Barclays Capital U.S. Corporate High Yield Index, which gained 1.21 percent.
. . . Spring slow to appear
Economic statistics continued to show weakness. The past winter—the coldest ever in the Northeast—certainly affected the economy, but other factors also slowed growth. The strong U.S. dollar hit exports and manufacturing, and a labor dispute at West Coast ports disrupted supply chains around the country. First-quarter 2015 gross domestic product (GDP) growth announced at April’s end was only 0.2 percent, well below expectations, and job growth dropped to 126,000 for March, also well below expectations.
Another significant negative factor was a reduction in business investment and government spending. Oil and gas drilling, in particular, dropped by almost one-quarter in response to lower oil prices, while state and local spending was down.
Despite the headwinds and negative data points, longer-term trends remained positive. Annual job creation is higher than at any point in the 2000s and job openings moved to new highs. Though some measures of consumer confidence were down, others were up, and retail spending and savings increased. Low oil prices reduced business investment but should eventually stimulate consumer spending and even now are helping consumers save. Further, as oil prices stabilize, oil investment activity, as seen through active rig counts, will presumably recover (see chart).
International uncertainty remains
Slower growth notwithstanding, the improving U.S. economy has supported global growth, with even Europe starting to turn around. Still, Europe’s economy remains a concern because of Greece’s financial situation.
The second area of concern is China, where signs of a significant slowdown continue to appear. Although the Chinese government is deliberately attempting to slow growth—aiming to change from investment-driven to consumption-driven growth—there are signs that the government is worried about the extent of the slowdown. It has implemented stimulus measures to accelerate growth, and further and more radical stimulus measures are rumored.
Spring slowly takes hold
Spring is taking longer to appear for the U.S. economy than anyone had anticipated. All the same, continued improvements in employment and consumer spending should lead to better growth, while the damage from the slowdown in the oil industry and the shock from the strong dollar will pass.
U.S. market results for April were solid if not spectacular, and company earnings, though down, are doing much better than expected. Technical indicators are strong, and even the risk areas, such as Europe and China, while worth watching, remain solid.
Overall, our stance remains optimistic. 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.