Monthly Financial Market Update

Transcription

1 Charles Sherry Director, Institutional Education Group Blue Ocean Global Wealth 6400 Goldsboro Road, Suite 550 Bethesda, MD Tel: Stocks Look to a Warmer Spring Monthly Financial Market Update February 28, 2014 Despite upbeat predictions to the contrary, stocks limped into There was no snap, no crackle, no pop. When emerging market woes flared up at the end of January, a shift out of equities and into safer Treasuries ensued (insights on the Ukrainian crisis are available at the end of the report). Of course, the S&P 500 Index registered a 30% gain in 2013 (St Louis Federal Reserve), and traders may have been looking for an excuse to book profits. Nagging worries about China and currency debacles in Turkey and Argentina became the perfect excuse to seek cover. Index February Return % 2014 YTD Return - % DJIA NASDAQ Composite S&P 500 Index Bond Yields Yield* - % a/o Feb 28, 2014 Yield - % a/o Dec 31, month T-bill year Treasury year Treasury year Treasury Commodities Feb 28 price, monthly change Year end 2013 Oil per barrel 4 $ $98.42 Gold per ounce 5 $1, $1, Sources: MarketWatch, U.S. Treasury, CNBC, St. Louis Federal Reserve, Energy Information Administration *Includes monthly change Economic data out of China continues to be soft (Markit Economics). But for now, Turkey s lira and the Argentine peso have stabilized (Bloomberg), and emerging market troubles have receded. Without any significant global headwinds to restrain stocks, the S&P 500 Index surpassed its December 31 record. If you re keeping score, the S&P 500 overcame a 5.8% decline between December 31, 2013 and February 3rd (St. Louis Federal Reserve).

2 The polar vortex collides with the economy Let s start with manufacturing. The ISM Manufacturing Index is a closely followed survey of supply executives. In theory, what s happening at the early stages of production should trickle through to production. Released in February, the January ISM Manufacturing Index posted its third-largest pullback since Comments released by the ISM signaled that weather and transportation delays had an effect see Figure 1. Note: a reading above 50 on the ISM Mfg Index suggests expansion; a reading below 50 suggests contraction. Last date: Jan 2014 Manufacturing accounts for a small percentage of the overall economy, but it still packs a powerful punch. Note in Figure 1 that the S&P 500 Index and changes in the ISM Mfg Index are fairly well correlated. Meanwhile, housing came under pressure. Last date: Feb 2014 for the Housing Market Index; Jan 2014 for single-family housing starts Note: a reading above 50 on the Housing Market Index suggests builders are optimistic; a reading below 50 suggests builders are pessimistic

3 The Housing Market Index, which measures confidence among homebuilders, stumbled by 10 points in February largest decline since the survey began in 1985 (National Assoc. of Homebuilders or NABH). The NAHB cited cold weather as one of the reasons for the steep drop in sentiment. Moreover, the traffic subcomponent fell sharply, suggesting rough weather in parts of the country kept potential buyers out of model homes. Single-family housing starts also stumbled, falling a sharp 15.9% in January (latest data available from the Census Bureau). Moreover, single-family starts fell by an astounding 60.3% in the frozen Midwest. It s difficult to push dirt around or set foundations in frigid temperatures. Yet, in the drier and warmer western U.S., housing starts climbed by 10.7%. The cold keeps bears, not bulls, in hibernation Yet, the broad-based S&P 500 Index bottomed out on February 3rd and set an all-time high as the month came to a close. Fed Chief Janet Yellen, who replaced Ben Bernanke at the beginning of February, said, A number of data releases have pointed to softer spending than analysts had expected. That may reflect in part adverse weather conditions, but at this point it is difficult to discern exactly how much (Wall Street Journal). She s not convinced the latest economic soft patch can be completely blamed on Mother Nature. Neither is the bond market (see Figure 3; I ll explain shortly). But the rally on Wall Street suggests that the snow and ice are behind the economic slowdown, and we ll get an economic bounce in the spring.

4 If you review some of the market internals, I think you can draw the same conclusion. Standard & Poor s breaks down the S&P 500 Index into ten sectors. According to data provided by StockCharts, the cyclical issues, or those sectors that are more dependent on the economy, led this month s rally, while the more defensive issues have lagged. Had defensive groups led the market, it could be argued that rock-bottom interest rates, coupled with the lack of major equity headwinds, had encouraged investors to pour cash into defensive sectors that typically pay higher dividends rather than industries that benefit from a stronger economy. It s still early, but the ISM Mfg Index for February (released on March 3) rose more than expected (Bloomberg). Still, leading indicators rarely flash all green. While stocks have climbed to new highs, there s a bit more caution in the bond market see Figure 3 as yields have failed to move back to prior highs. Still, we re not seeing a precipitous drop either. Look ahead escalating tensions between Russia and Ukraine Markets loathe unusual amounts of uncertainty, and heightened instability in Ukraine has understandably spook investors, at least temporarily, because traders sometimes take a shoot now and ask questions later approach when a crisis emerges. From a geopolitical perspective, the situation is extremely fluid right now. But let me quickly add, geopolitical instability has historically created only short-term jitters. The brutal civil war in Syria and the alleged use of chemical weapons quickly comes to mind. The same holds true for the Arab spring. Markets move on when a crisis does little damage to U.S. economic interests; it s the devastating humanitarian toll that can be long-lasting. While diplomats failed to prevent Russian aggression and western options are limited, capital markets are inflicting some pain, at least initially. Russia s major stock market index fell over 11% as March began, and Russia s ruble, which was already down nearly 10% against the dollar since January 1, slid to a record low (Bloomberg). That forced the country s central bank to raise its key lending rate from 5.5% to 7.0% (Wall Street Journal). But does Vladimir Putin care? Russia is rolling the economic dice. The elite have their assets in Western banks, and Russian companies rely on international debt markets for financing (Bloomberg). Yet, Russian foreign reserves (akin to a rainy day fund) stand at $498 billion (Trading Economics), reducing the odds of a financial crisis similar to Additionally, Russia, with is vast oil reserves, sports a trade surplus (Trading Economics), unlike some of the shakier emerging market economies. No one has a crystal ball, but if we use history as our guide, the Street will eventually put the latest global crisis in the rearview mirror. It would probably take a major confrontation between the U.S. and Russia to really rattle markets. Such a confrontation is unlikely.

5 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. 2 The NASDAQ Composite is an unmanaged index of 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. 6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; 2012/2013 year-end price fixing at 10:30 a.m. London time; Prices can and do vary; past performance does not guarantee future results.

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