After a volatile winter, stocks ended the quarter about where they started. Oil prices, a strong dollar, and concerns about interest rates contributed to the volatility and uncertainty remains as we enter the second quarter. For the quarter, the S&P 500 gained 0.47%, the Dow lost 0.32%, and the NASDAQ gained an outsized 3.68%.[1. http://goo.gl/LHCQBB]
What are some of the factors that affected market performance in Q1?
Economic growth data suggested that the economy might have slowed at the beginning of the year. After a strong third quarter of 2014, the economy lagged in the final three months of the year, clocking in just 2.2% growth. Overall, the economy grew 2.4% in 2014, up from 2.2% in 2013.[2. http://www.foxbusiness.com/economy-policy/2015/03/27/us-economy-grew-22-in-fourth-quarter/ , http://www.businessinsider.com/q4-gdp-third-estimate-march-27-2015-3] While we don’t have official first quarter GDP numbers, unofficial estimates suggest that economic growth may have ground to a halt in the first quarter.
Though 0.0% GDP growth isn’t great news, keep in mind that the economy shrank 2.1% in the first quarter of 2014 and then rebounded to grow 4.6% in the second quarter and 5.0% in the third quarter.[3. http://www.forbes.com/sites/samanthasharf/2014/07/30/u-s-gdp-grew-4-in-the-second-quarter-2014/ , https://www.whitehouse.gov/blog/2014/12/23/third-estimate-gdp-third-quarter-2014] There’s no guarantee that we’ll see a repeat of last year’s trend, but warmer spring weather may translate into stronger consumer spending and housing market activity.
Much of the slowdown in growth can be attributed to the effects of the strong dollar and weak oil prices. While cheap oil is a windfall to U.S. consumers who benefit from lower pump prices, volatile prices are hitting domestic oil producers hard. The strong U.S. dollar, which gained over 15.0% on the euro last quarter, has also affected demand for U.S. products.[4. Historical USD/EU daily bid rates between 1/1/15 and 3/31/15 http://www.oanda.com/currency/historical-rates/ ]
Investors were also concerned about weak overseas growth, which is affecting corporate profits. The U.S. economy has disengaged from global growth and is leaving many other economies behind. Though domestic demand is strong, lagging economic growth in Europe and other economies is complicating the global growth picture. However, the European Central Bank has stepped up to undertake its own quantitative easing program and we can hope that Eurozone growth will accelerate.[5. http://www.bloomberg.com/news/articles/2015-03-16/how-europe-s-historic-qe-plan-is-seen-shaping-up]
The labor market continued to make important strides last quarter, adding over half a million new jobs. The overall unemployment rate dropped to 5.5% – the lowest rate in six years. Wage growth also picked up as employers were forced to offer higher pay to attract workers.[6. http://www.bls.gov/news.release/pdf/empsit.pdf ] However, the March jobs report shows that the economy created just 126,000 new jobs, less than half of February’s gain and the smallest gain in over a year.[7. http://www.foxbusiness.com/economy-policy/2015/04/03/march-jobs-report/?intcmp=marketfeatures] Was March just an off month because of oil prices and a cold winter? That’s the question the Fed will need to answer as it ponders future interest rate moves.
What could act as headwinds in the weeks and months to come?
The Federal Reserve has been a big player over the last few months and speculation around future monetary policy decisions will likely cause market volatility in the coming weeks and months. Now that economy-stimulating bond purchases have ended, the Fed is planning to raise interest rates sometime this year. Though March’s disappointing jobs report may give Fed economists pause for thought, interest rate changes may cause investors to get nervous. We know that the Fed is carefully monitoring data and will make only gradual changes to rates, so we can hope that market reactions will be brief.
Markets are running high, with the S&P 500 closing within 5.0% of its all-time high for 56 of the 61 trading days last quarter. Such strong investor optimism can sometimes presage a pullback as investors pause to take stock of the market environment. Is a pullback certain? Certainly not. We don’t have any way to predict what will happen so we focus on setting reasonable goals, managing risk, and keeping a careful eye on market movements.
Bottom line: Though many domestic economic fundamentals are strong going into the spring, weak oil prices, a resurgent dollar, and stagnant overseas growth could cloud the picture. As Q1 earnings trickle in, positive surprises could translate into additional market upside. However, earnings estimates have come down in recent weeks and corporate profits may be affected by rising wages and slower growth.[8. http://www.zacks.com/commentary/40989/what-to-look-for-this-earnings-season]
Since we can’t know where markets are going with any certainty, we recommend staying focused on your long-term goals and keeping short-term performance in perspective. We are continuously monitoring markets and are prepared to make changes as conditions warrant.
If you have any questions about your investment strategy, please give us a call. We’d be delighted to discuss it with you.
Monday: ISM Non-Mfg. Index
Wednesday: EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims
Friday: Import and Export Prices, Treasury Budget
Consumer spending flat in February. Spending by U.S. consumers barely moved in February as savings levels rose to their highest levels in more than two years. While this may affect economic growth in the first quarter, it may bode well for future spending.[9. http://www.foxbusiness.com/economy-policy/2015/03/30/personal-spending-income-rise-in-february/]
Motor vehicle sales edge upward in March. Consumer demand for new vehicles picked up slightly last month. Sales were driven largely by demand for foreign cars and big trucks and SUVs from domestic manufacturers.[10. http://www.foxbusiness.com/industries/2015/04/01/fcau-march-sales-meet-wall-street-views/]
Factory orders surge in February. Despite the strong U.S. dollar, new orders for manufactured goods unexpectedly rose 0.2% in February after six straight months of declines. Excluding volatile transportation orders, factory orders rose 0.8%.[11. http://www.foxbusiness.com/economy-policy/2015/04/02/factory-orders-rise-in-february/ ]
U.S. trade deficit narrows. The gap between imports and exports narrowed in February as a strong dollar and a labor dispute at one of America’s main ports affected trade. The small deficit may raise first quarter GDP estimates.[12. http://www.foxbusiness.com/economy-policy/2015/04/02/us-trade-gap-narrows-to-lowest-level-since-0/?intcmp=fbtopstories]
Stocks ended the week mixed after losses related to a lower fourth-quarter Gross Domestic Product estimate. However, after a lackluster January, the major indices ended February on an upbeat note, with the S&P 500 posting a 5.5% gain.[1. http://goo.gl/7djSNs] For the week, the S&P 500 lost 0.27%, the Dow lost edged down 0.04%, and the NASDAQ gained 0.15%.[2. http://goo.gl/xuK4x9]
Though we’re two-thirds through with the first quarter of 2015, investors were thinking about fourth-quarter 2014 GDP last week. The revised estimate shows that the economy grew 2.2% in the final three months of the year, lower than the 2.6% originally reported. However, the good news is that consumer spending, one of the largest contributors to the economy, grew at the fastest pace in four years.[3. http://www.bloomberg.com/news/articles/2015-02-27/u-s-gdp-grew-less-than-previously-estimated-in-fourth-quarter] A significant downward revision of business inventories, a measure of how optimistic U.S. firms are about future demand, was mostly responsible for the lower GDP report.[4. http://www.cnbc.com/id/102462716]
Federal Reserve chair Janet Yellen gave investors some more guidance about interest rates in speeches before the House and Senate. Though she still preaches patience, she also indicated that the central bank might raise rates as early as July. Though the rate raise may give stocks the jitters, banks may respond by raising consumer rates to compete for your business. On the other hand, higher rates could drag on the housing market.[5. http://www.foxnews.com/opinion/2015/02/25/five-things-should-know-about-janet-yellens-plan-for-higher-interest-rates/]
With earnings season largely over, we can start drawing some conclusions about how U.S. companies did in the fourth quarter. Overall, Q4 earnings gave us a mixed picture. Out of 465 S&P 500 companies, earnings were up 6.5 percent over fourth quarter 2013, but revenues were up just 1.6 percent.[6. http://www.zacks.com/commentary/38064/q4-earnings-season-winding-down] These results suggest that many firms are still struggling with weak demand. Many firms also issued low guidance for the first quarter of 2015, indicating that they’re worried about their growth prospects this year – this squares with the lower business inventories data found in the Q4 GDP report.[7. http://www.zacks.com/commentary/38064/q4-earnings-season-winding-down] Hopefully, we’ll see lower energy prices push up spending and help U.S. companies beat their earnings estimates.
Looking ahead, analysts will be focusing on the February jobs report this week, which they hope will show that the labor market continues to recover. Investors will spotlight wage growth, a key figure that indicates how much more money workers have in their wallets.[8. http://www.cnbc.com/id/102464548] Economists anticipate that improving job prospects and low gasoline prices could support increased consumer spending this quarter.
Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Motor Vehicle Sales, Janet Yellen Speaks 8:15 PM ET
Wednesday: ADP Employment Report, SM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Productivity and Costs, Factory Orders
Friday: Employment Situation, International Trade
Pending home sales rises to highest level since 2013. A measure of houses under contract rose in January as better credit conditions and more jobs boosted housing market activity. Since we are approaching prime home buying season, analysts hope the trend will continue into the spring.[9. http://www.foxbusiness.com/markets/2015/02/27/pending-home-sales-in-january-rise-to-highest-level-since-aug-2013/]
New single-family home sales drop slightly. Sales of newly built houses edged downward in January, possibly because of cold winter weather in the Northeast. However, sales are up 5.4% since January 2014 in a hopeful sign for the sluggish housing market.[10. http://www.foxbusiness.com/economy-policy/2015/02/25/january-new-home-sales-fall-less-than-expected/]
Durable goods rise in February. Orders for long-lasting manufactured products – like cars, refrigerators, and electronics – climbed 2.8% from January, indicating that businesses expect to be able to sell big-ticket items in coming months.[11. http://www.foxbusiness.com/economy-policy/2015/02/26/durable-goods-orders-rise-more-than-views/]
Consumer sentiment drops slightly in February. Icy weather caused a gauge of consumer sentiment to slip last month. Despite the harsh weather, American confidence in the economy remains near eight-year highs.[12. http://www.foxbusiness.com/markets/2015/02/27/us-consumer-sentiment-index-slides-in-february-as-wintery-weathers-chills/ ]
Markets shook off losses last week and ended with strong weekly gains on the back of a positive January jobs report. For the week, the S&P 500 gained 3.03%, the Dow rose 3.84%, and the Nasdaq grew 2.36%.[1. http://goo.gl/qrk64M]
January’s monthly Employment Situation report showed that the economy gained 257,000 new jobs last month. Though the unemployment rate rose to 5.7%, it went up for the right reasons as Americans rejoined the labor force and began searching for jobs again. Best of all, average earnings grew 0.5%; since economists have been worrying about the slow pace of wage growth in the recovery, a jump in earnings is good news for the economy.[2. http://www.cnbc.com/id/102404264]
Though wages went up, consumer spending in December dropped to its lowest level in five years as Americans cut spending and used extra gas money to boost their savings.
Higher incomes, lower prices at the pump, and falling inflation are giving American households a much-needed boost in spending power this year.[3. http://www.marketwatch.com/story/consumer-spending-falls-by-most-in-5-years-2015-02-02] Though the drop in consumer spending could hit Q4 economic growth numbers, the underlying factors set the stage for a strong 2015 for American consumers.
Stocks lost a little steam on Friday due to growing concern over a standoff between Greece’s new anti-austerity government and Eurozone leaders. Greek leaders are seeking to tear up the agreements signed by the previous government in favor of debt forgiveness from the EU. However, the message from EU leaders to Greece is clear: Uphold your financial commitments and stick to the plan.[4. http://www.reuters.com/article/2015/02/07/us-eurozone-greece-leaders-idUSKBN0LB09420150207]
Though Greek voters are unequivocally tired of painful austerity cuts, Greece still depends on EU money, and its new leaders must tread carefully. Citing concern about how a liquidity crunch would affect Greece’s ability to repay debts, Standard and Poor’s downgraded Greek sovereign debt from B to B-.[5. http://www.reuters.com/article/2015/02/06/us-s-p-ratings-greece-idUSKBN0LA22320150206] What will the outcome of the showdown be? Hard to know at this stage, but the conclusion will likely affect how future negotiations with Spain, France, and Italy play out.
Looking ahead, though the week ahead is light on economic reports, analysts will be closely monitoring the January retail sales report to see how Americans are spending. The Labor Department’s Job Openings and Labor Turnover Survey that comes out Tuesday will also give some more insight into the overall health of the jobs recovery.[6. http://www.cnbc.com/id/102405815] Positive data could renew focus on the Federal Reserve and a possible interest rate hike this year.
Wednesday: EIA Petroleum Status Report, Treasury Budget
Thursday: Jobless Claims, Retail Sales, Business Inventories
Friday: Import and Export Prices, Consumer Sentiment
Q4 earnings reports show revenue weakness. Though overall earnings are positive, U.S. firms are still struggling with weak demand. Including reports from 274 S&P 500 companies, overall earnings are up an optimistic 6.7% from Q4 2013; however, revenues are up just 0.2%.[7. http://pdf.zacks.com/pdf/ZR/H4773042.PDF]
U.S. motor vehicle sales catch fire in January. U.S. automakers reported the strongest January car and truck sales in seven years. Ford and GM had strong months, showing that sales increased 15% and 18%, respectively, over last year.[8. http://www.reuters.com/article/2015/02/03/us-usa-autos-idUSKBN0L71BN20150203, http://www.bloomberg.com/news/articles/2015-02-03/fiat-chrysler-rides-jeep-ram-pickups-to-14-january-sales-gain]
U.S. productivity falls in Q4 2014. Hourly output per worker, a measure of the productivity of the U.S. economy, fell 1.8% in the final three months of 2014. This could mean that employers have eked out every drop of labor from their workers (and may be forced to raise wages).[9. http://www.cnbc.com/id/102400089]
Brent crude has best gains in 17 years. Oil rallied again and showed the best two-week performance since 1998, gaining 19%. Price volatility was stoked by falling oil production and violence in Libya.[10. http://www.reuters.com/article/2015/02/06/us-markets-oil-idUSKBN0LA02920150206]