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EWM Monthly Commentary: Spring Seeds of Hope

By April 17, 2015No Comments

After a long and difficult winter, many investors are wondering whether the Spring thaw will bring with it enough sustenance to reinvigorate the economy. First quarter data was less than upbeat, and despite a modestly positive start to April, several questions remain:

  1. Has oil reached a bottom?
  2. Does the US dollar have enough support to continue its upward trajectory?
  3. Has the Federal Reserve Bank (Fed) planted enough seeds for domestic growth?

Oil prices continue to weigh heavily on the stock market, as the price for a barrel of crude has precipitously fallen from a peak of $98 in September 2014 to $56 as of yesterday’s close. It dipped as low as $45 dollars a barrel in March but has rebounded back in recent weeks, supported by a strengthening in fundamentals and a tightening in supply.Global quantitative easing along with impending interest rates hikes have buoyed U.S. dollar strength.

The 10 year yield fell to 1.9% yesterday (4/16/15), hovering near all-time historical lows. Prior to 2011, the last time the 10 year yield was under 2% was February 23, 1951. Since that time, it has fluctuated regularly between 1.43% and 3.75%, falling below 2% on 357 of 1,073 trading days over the past four years.

As the Fed lays the groundwork for raising rates, it will have to consider when and at what pace. Although Janet Yellen did not rule out a June hike in the March meeting, the consensus handily favors September. Inflation is expected to remain low, and job growth slowed in March— driven in part by cuts in the energy sector which has historically been a key driver in non-farm job creation. Nonetheless, unemployment remains relatively stable at 5.5%, and the first quarter marked twelve consecutive months of job gains in excess of 200,000—the longest streak in nearly two decades.

So the big question is, does the recovery have legs, or will the engine stall? The signals are mixed. Following Wednesday’s disappointing industrial production numbers, estimates of real GDP growth fell to as low as 0.1% according to Atlanta Federal Reserve’s new GDPNow1 indicator; this comes in sharp contrast to GDP growth of 2.2% in Q414. Industrial production has been on the decline for the past three months, and March’s decline of 0.6% marked the largest decrease since 2012. A strong U.S. dollar is crippling exports, and weak oil prices have encumbered the operations of energy stalwarts.

On the positive side, consumer spending remains high, and housing starts are on the rise. Residential housing rebounded last month, although by less than expected.  The stock market is showing areas of opportunity, particularly in small- and mid-cap, with healthcare demonstrating solid gains.  It is worthwhile to note that at this juncture last year, Q1 2014 GDP also contracted, but the economy quickly recovered making positive strides for the rest of 2014. Although first quarter growth may similarly stall, the long term picture should remain robust, as we decelerate from an above trend environment to one of more moderate growth.

1 – The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. The GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release.