Highlights of this Month’s Newsletter:
- S. stocks made small gains, keeping the indices barely positive so far in 2015.
- The NASDAQ Composite finally breaks above its old high reached back in 2000 before the dot.com bubble burst.
- Interest rates rose in April as well as oil prices.
- S. economy bogs down in the first quarter which may postpone a FED rate hike until later in the year.
- Slow growth ahead for the economy is likely.
- Our portfolios have fared well this year relative to risk, and individual stock issues continue to be our focus for equity exposure.
READ ON FOR ADDITIONAL DETAILS……………………………………………
The Markets:
The major U.S. stock indices eked out small gains in April, with the Dow Jones Industrial Average gaining just .36%, bringing the 2015 year-to-date return to a mere .10% after four months. The S&P 500 gained .85% for the month, and is now up 1.29% so far this year. (Marketwatch)
Interest rates rose (bond prices fell), with the yield for the 10 year U.S. Treasury ending April at 2.05% compared with 2.17% at the end of 2014. (U.S. Treasury) Mortgage rates are now in the 3.75-4% range for a 30 year fixed rate, and 2.85-3.325% for a 15 year fixed mortgage. (Bankrate.com, Bank SNB)
Oil prices rebounded during the month, with West Texas Intermediate Crude jumping $10.55 per barrel to end April at $59.77. (CNBC)
The U.S. Economy Slows to Crawl Speed
A welcome acceleration in the economy during much of 2014 has given way to another round of lackluster economic performance. Gross Domestic Product (GDP), which is the broadest measure of economic activity, slowed from an annualized pace of 2.2% in the fourth quarter of 2014 to a scant 0.2% in Q1 2015 (Bureau of Economic Analysis). For all practical purposes, growth stalled in the first three months of the year.
The reasons many analysts give for the slowdown include winter weather, the since-resolved West Coast port slowdown, the strong dollar, and steep cutbacks in business spending in the energy industry.
Figure 1 highlights the economy was experiencing a fair degree of momentum in the second and third quarters of 2014, while the slowdown began in Q4, prior to any impacts from weather and work stoppages on the West Coast.
More importantly, a closer look at the GDP data reveals that falling exports detracted nearly a full percentage point from GDP (BEA) – that’s likely the stronger dollar reducing export competitiveness. Meanwhile, a decline in business capital expenditures lopped another 0.4 percentage points from GDP – much of which came from a sharp reduction in business spending in the oil patch (BEA).
At over $1 trillion annually (Annual Survey of Capital Expenditures), capital spending by businesses is an important component of overall economic growth. Furthermore, oil/gas and related business spending accounts for over $1 in every $8 spent, making it the largest component of capital outlays, according to the government’s Annual Survey of Capital Expenditures.
Business spending not only translates into real demand for goods and services, but it is also a signal of business confidence, because outlays won’t typically accelerate if firms don’t anticipate or are experiencing stronger sales.
While the broad-based measure of economic activity is not signaling a recession, growth has not only slowed, but the latest soft patch is much steeper this year versus early 2014, when an unusually harsh winter temporarily crimped growth. Two key differences in 2015: the stronger dollar, which hurts exports, and the collapse in oil prices, which has roiled the energy sector. The headwinds were clearly evident in the GDP data.
Yet, the mini windfall of savings at the gas pump hasn’t been recycled into more robust spending, at least not yet. Instead, it has gone mostly into savings, with the savings rate rising from 4.6% in Q4 2015 to 5.5% in Q1 2015 (BEA).
Looking ahead and cautious optimism
Most economists and the Federal Reserve expect a modest pick-up in growth in the current quarter (Bloomberg). It’s only one month, but following three months of weakness, retail sales rebounded in March (U.S. Commerce Dept.). Both new and existing home sales have been gradually perking up (National Association of Realtors, Commerce Dept.), and first time claims for unemployment insurance have been trending lower over the last two months (Dept. of Labor).
Beyond what’s happening in the real economy, the slowdown in growth has greatly diminished odds the Fed will implement its first rate hike in nearly 10 years at the June meeting. April’s CNBC Fed Survey (CNBC.com) shows 84 percent of respondents believe a rate hike will occur this year. But economists, analysts and money managers surveyed don’t see the Fed hiking until October, two months later than in the March survey.
Even with the current economic uncertainty, the NASDAQ Composite achieved a new milestone, surpassing the old record set in March of 2000 (St. Louis Federal Reserve). That’s quite an achievement given what happened after the dot-com bubble burst. Even so, most of the broader U.S. indexes have failed to post significant gains this year, in part, because slower economic activity dented earnings expectations. But recent market action suggests the economy will continue to advance, even if it’s not at an impressive pace.
Our Outlook:
We continue to utilize individual stock issues for our equity exposure which has helped provide attractive returns for this segment of our portfolios relative to each risk level. We have increased the number of stock issues held for each of our three stock models in an effort to add diversification across various industries. Given that the major stock indices are up only slightly so far in 2015, we are very pleased with the overall net returns for portfolios across all risk levels. Our fixed income assets are spread among several bond types including but not limited to, corporate, high yield, and international, as well as short to intermediate maturities. We have selected various funds to provide our fixed income/bond investments with an emphasis on diversification and possible higher interest rates in the future. We will continue to monitor the markets and keep you advised.
Please don’t hesitate to call if you every have any questions or if we can be of further service in any way. We appreciate the privilege to serve you and look forward to working together in the years to come.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice.
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Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
Uncertainty and Volatility