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EWM Monthly Commentary

Apr 17
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EWM Monthly Commentary: Spring Seeds of Hope

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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.

Source:  https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm

Aug 03
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EWM Monthly Commentary: July-2014

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Domestic equity markets posted modest losses in July, after having delivered five straight monthly gains. Global turmoil finally caught up with stock prices, as Argentina failed to meet a deadline for a $539 million interest payment, and geopolitical unrest simmered in many parts of the world. On the positive side, economic data continued to trend well, highlighted this week by the first estimate of second quarter gross domestic product (GDP), which came in at +4.0% – a significant improvement over the -2.9% contraction of the first quarter. Employment gains remained robust in July, with 209,000 jobs added. Even though the gain was slightly below forecast, it represented the first time since 1997 that the economy has had six consecutive months of gains of more than 200,000. The unemployment rate ticked up to 6.2%. Geopolitical tensions continue to grab headlines and cause concern among investors.

Within this landscape, stocks were soft for the month. The S&P 500 declined -1.4% for the month, and is now up +5.7% on a year-to-date basis. The Dow Jones Industrials also dropped -1.4%. The tech-heavy Nasdaq Composite Index slid -0.8% as technology stocks continued to post solid relative results. The Russell 2000 Index of small cap stocks significantly under performed the Russell 1000 Index of large cap stocks, with returns of -6.1% and -1.6%, respectively. Growth stocks  fared slightly better than value stocks during the month. In terms of sector performance, telecom services was the strongest performer on a relative basis, gaining +3.7%, while utilities were the poorest performers, posting a decline of -6.8%.

International equity markets were also mostly lower in July, although performance was varied regionally. The MSCI World ex-U.S. Index dropped -1.0% for the month. Emerging markets continued their relative rebound, and outperformed developed markets for the month. The MSCI Emerging Markets Index gained +2.0% for the month. The MSCI EAFE Index, which measures developed markets performance, declined -2.0% for the month. Regionally, China and Pacific ex-Japan were the best performers on a relative basis, with the MSCI China Index and the MSCI Pacific ex-Japan Index gaining +7.3% and +3.7%, respectively. Eastern Europe and Europe were among the poorest performers, with results of -7.8% and -3.8%, respectively.

Fixed-income markets were mostly lower in July, but have still fared relatively well on a year-to-date basis. As has been its custom in every one of its meetings so far this year, the Fed continued its pace of tapering of its asset purchase program during the month, reducing purchases by an additional $10 billion. With this as a backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.56%, up four basis points from the 2.52% level of June 30th. Broad-based fixed-income indices were modestly lower in July, with the Barclays U.S. Aggregate Bond Index shedding -0.3% for the month. Global fixed-income markets did not perform as well, with the Barclays Global Aggregate ex-U.S. Index returning -1.4% for the month. Intermediate-term corporate bonds were also lower, as the Barclays U.S. Corporate 5-10 Year Index dropping -0.2%. The Barclays U.S. Corporate High Yield Index posted a loss of -1.3% for the month. Municipals bucked the trend, and posted a gain of +0.2%.