April 2016 Market Commentary

Transcription

1 April 2016 Market Commentary Domestic equity indices finished the month mixed, while international developed markets ended higher. The falling U.S. dollar continued to reverberate across markets, especially unhedged developed fixed income and local currency denominated emerging markets debt, both of which are negatively correlated to the U.S. dollar. Commodities and MLPs experienced strong gains throughout the month on continued strength in the real assets markets. For the month, the S&P 500 Index gained 0.4%, while the Russell 2000 Index of smaller companies increased 1.6%. The materials, financials, energy and healthcare sectors were the top performers, while information technology and the consumer-related sectors were weaker. Across market capitalizations, small-cap securities generally outperformed their large- and mid-cap counterparts. Across styles, value outperformed growth across all market capitalizations. U.S. fixed income markets were positive across all asset classes. Long-maturity Treasuries underperformed shorter-dated issues as the yield curve steepened. Investment-grade corporate securities were higher as industrial- and utility-related credits were top performers. Lower quality, higher yielding corporate securities experienced gains as well. Other sectors, including mortgage-backed securities (MBS), asset-backed securities (ABS) and municipal bonds, also ended higher. International markets were positive as the MSCI EAFE added 3.0%. Among the largest European markets, France and Germany gained 2.0% and 1.3%, respectively. Meanwhile, Italy and Spain posted returns of 2.9% and 5.2%, respectively. Within the Pacific region, Japan added 4.7%, while Australia gained 2.9%. In the emerging markets, the MSCI EM ended 0.6% higher amid notable performances from select Emerging Asian, Latin American and EMEA (Eastern Europe, Middle East and Africa) Index countries.

2 World Market Recap Economy According to the initial estimate of economic growth released by the Bureau of Economic Analysis, first quarter GDP increased at an annual rate of 0.5%. This reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment and state and local government spending. These were partially offset by negative contributions from private inventory investment, falling exports, nonresidential fixed investment and federal government spending. The second estimate for first quarter GDP is due out on May 27 th, The FOMC maintained the existing target range for the federal funds rate at 0.25% % during its April meeting. The decision to maintain the current target range was largely based on current inflation relative to the committee s 2% longer-run objective as they saw continued strengthening in the labor market. The existing policy of reinvesting principal payments from agency debt and mortgage-backed securities, as well as rolling over maturing Treasury securities at auction, will continue until the normalization of the target interest rates. The FOMC will not meet during the month of May and will hold their next scheduled meeting June 14 th 15 th. Fixed Income U.S. Treasury yields rose during the quarter as the rate on the 10-year increased 6 basis points to end at 1.83%. The decline in prices (increase in yields) occurred as market participants shifted marginally from safe haven assets as volatility remained relatively muted compared to the start of the year. Investment grade corporate securities were higher for the month. The industrial sector, which advanced 1.7%, was the strongest performing corporate credit sector. Utility- and financial-related credits followed, gaining 1.0% and 0.9%, respectively. Lower quality, higher yielding corporate securities also finished higher. For the month, BB-rated issues gained 2.6%, B-rated issues climbed 3.8%, while CCC-rated credits rose 7.8% following continued recovery of energy prices and lower volatility in the high yield space. Fixed rate MBS gained 0.2% during the month. The U.S. Census Bureau reported that the home ownership rate fell to 63.6% on a seasonally adjusted basis during the first quarter of the year. Ownership rates have been steadily declining since 2005 and are now marginally higher than multi-decade lows which were set in Municipal bonds increased 0.7%. Puerto Rico missed principal payments on bonds issued by the Government Development Bank, marking the country s third missed debt payment. There is mounting concern that they may miss a $1.9 billion payment on General Obligation bonds that is due on July 1 st. However, the rest of the market has priced in the problems in Puerto Rico as specific to the region.

3 U.S. Equity U.S. stocks finished mixed during the month. The S&P 500 Index rose 0.4%, while the technology-heavy NASDAQ Composite declined 1.9% and the Dow Jones Industrial Average gained 0.6%. Energy was the best performing sector during the month as oil and gas companies rose 9.0%. The move was largely a response to a 15.9% increase in the price of crude and an 8.7% increase in the price of natural gas. The positive price movements provided much needed relief for many companies as the number of bankruptcies within the space continues to increase. Materials also performed well during the month, gaining 4.8% as increases in metal and mining led the sector higher. The healthcare sector gained 3.0% as equipment, services, pharmaceutical and biotechnology all contributed to performance. Pfizer and Allergan terminated their $160 billion merger early in the month following proposed regulations that would crack down on corporate tax inversions. The deal was set to be the largest ever in drug industry history and would have shifted New York-based Pfizer s tax liabilities overseas to a more friendly tax environment. The technology sector fell 5.9% during the month as hardware and equipment underperformed their software counterpart. Earnings were a key driver of performance. Most notably, shares of Apple (AAPL) fell sharply following earnings that failed to meet analyst expectations and the company also saw its first revenue decline in 13 years. The financial sector gained 2.5% as strong performances from banks was partially offset by a small decline in real estate. Earnings from the largest banks were mostly positive which helped performance. Also making news was a $5 billion settlement that was finalized between Goldman Sachs and the Department of Justice related to mortgage-backed securities between 2005 and International Developed Markets Canadian equities advanced 6.8% despite a 0.1% decline in GDP in February as the economy decelerated for the first time in nearly four months. Manufacturing, wholesale trade and the natural resources sectors were headwinds to growth. Economists cited weaker GDP growth in the U.S., Canada s largest trade partner, as the primary reason for the short-term fall in GDP growth. According to Statistics Canada, the trade surplus with the U.S., which accounts for approximately 75% of demand for Canadian exports, fell to $1.5 billion, the lowest level since The UK equity market gained 3.5% despite a 0.2% decline in first quarter GDP growth compared to the fourth quarter of last year. The slowdown was mostly attributed to a fall in construction activity as well as declining industrial and manufacturing output. Services, which make up the largest portion of the economy, grew by 0.6%. Economists attributed the slowdown in economic growth to continued uncertainty surrounding Brexit as businesses and consumers delay spending until after the June 23 rd vote. This uncertainty also led the IMF to downgrade its growth forecast for the UK, citing potential disruption for the economy.

4 Eurozone equity returns were mostly positive throughout the month. The currency union received much needed good news as the unemployment rate fell to its lowest reading in approximately five years. Moreover, GDP growth rallied to 0.6% for the first quarter as increased consumer spending and business investment added to total output. Economists cited long awaited relief from lower oil prices for boosting consumer confidence and increased consumption. However, the Eurozone continues to face challenges as inflation lingers below the European Central Bank s target. Member states also face opposition to much needed structural reforms, mounting debts and the ongoing refugee crisis. Within the Pacific region, Australia gained 2.9%, while New Zealand added 2.5%. Japanese equities posted a 4.7% return despite ongoing headwinds to economic growth. Exports fell for a sixth straight month primarily due to ongoing weakness in China, Japan s largest trade partner, and a strengthening yen which makes Japanese goods more expensive in foreign markets. Additionally, Japan s Kyushu manufacturing region was struck by earthquakes leaving global firms scrambling to reconfigure their supply chains due to disruptions in this key industrial hub. Toyota, Honda and Nissan suspended production as the three large automakers were either affected directly by the quake or their supply chain was partially disrupted. International Emerging Markets Within Asia, China fell 0.2%. Manufacturing activity fell for the 14 th straight month in April as demand disappointed despite increased credit expansion and infrastructure spending from Beijing. Economists do not believe the People s Bank of China will further ease monetary policy due to the steady rise in corporate debt, which is now 150% of GDP. India gained 0.5% as the IMF reiterated its 7.5% GDP growth forecast for 2016, citing strong private consumption. Lower energy prices and higher real incomes have translated into higher demand for goods and services. The report also suggested increased infrastructure investment and incentives for private investment should propel economic growth upward. Among other large Asian markets, Taiwan fell 5.3%, while South Korea ended lower 0.4%. In Latin America, Brazil climbed 10.4% on news that the lower house of congress voted to impeach President Dilma Rousseff. A Senate committee will vote May 11 th on whether to proceed with impeachment. Should the Senate confirm the lower house s vote, President Rousseff would be forced to step down from the presidency for 180 days. Vice President Michel Temer would take over depending on a final vote in the Senate throughout this time. Markets continue to trade in line with impeachment proceedings as the anyone but Dilma trade continues to be popular. Economically, Brazil tallied its highest trade surplus ever but still faces significant impediments to growth. Elsewhere in the region, Mexico fell 0.2% and the smaller Chilean market advanced 2.8%. Among EMEA countries, South Africa experienced a 4.2% gain. In the Middle East, Turkey rallied 4.5%, while Egypt surged 13.3%. Within Eastern Europe, Hungary advanced 3.3%, while Poland fell 7.7%. Russian stocks added 7.8% as energy prices ended the month on a positive note.

5 *All indices are unmanaged and investors can not actually invest directly into an index. Past performance is not indicative of future results. The S&P 500 Index is based on the average performance of 500 of the largest stocks monitored by Standard & Poor s. Russell 2000 Index measures the performance of small-cap stocks. MSCI EAFE is a market-cap weighted index representing 20 developed markets outside North America, including 14 European countries and 6 Pacific countries. MSCI Emerging Markets is a market-cap weighted index representing 26 emerging countries. This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates; L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any opinions expressed herein reflect our judgment at this date and are subject to change. Past performance does not indicate future performance.