Small and Mid-cap stocks have begun to outperform their larger brethren. Cold weather, lower oil prices, and dollar strength along with a West Coast port slowdown have reduced earnings estimates along with Q1 GDP forecasts. For Q1 2015 earnings for the SPX are expected to decline by 4.5 % about 45 % of the decline due to energy companies. .
The Russell 2000 which represents the small cap segment of the U.S. equity universe returned 4.3% after under performing last year. Investors crave domestic exposure while the dollar is soaring despite P/E’s that are higher than in the big cap universe.
10 year U.S. Treasury notes closed with a 1.93 % yield versus a January yield of 2.17%. Similar yields in Germany and France are 0.18 % and 0.48 % respectively. European stocks are doing rather well finally as that Continent's QE program drives financial assets higher and the Euro lower.
Some 17 global stock indices set fresh new highs as easy money policies and signs of stability in some troubled economies lifted share prices.
With low yields in the U.S. and some negative yields in Europe savers are coaxed out cash into the longer part of the yield curve or into stocks to earn positive returns.
The savings rate here has risen to 5.8% recently contributing to slower economic activity.
While the Federal Reserve is talks about “ normalizing “ US interest rates European and Japan's QE programs are robust and continuing driving the dollar higher while making European and Japanese companies more competitive and profitable.
Plunging oil prices caused oil futures to drop 11% to $47.60 by quarter end. This is a good thing similar to a tax cut for consumers. The beneficial impact on consumer spending is generally delayed for a few quarters as they decide whether the drop in prices is permanent.
Central bankers see their policies as working to stop deflation, bolster GDP, and give shaky governmental and corporate borrowers a new lease on life.
Investors now appear to fear higher interest rates and bubbles in bond and stock markets. Is growth in our economy real or artificially induced by government policy? Trust of government solutions is near an all-time low even as markets make new highs.
Politicians sit back and let Central bankers do the heavy lifting while they give lip service to fiscal policy reforms.
Markets do what markets do with easy money, they go higher. Yet with little tangible evidence that the economy is safe and on a sound footing we experience periodic bouts of fear, when short sharp sell offs ensue.
As 2016 is a presidential election year, the Fed will only have a small window in which to raise rates. September is our best guess for the first rate rise.
Global conflict concerns center around the Middle East. Iran wants sanctions lifted and the US President and Europe want a deal which will reintegrate Iran into the world economy. Opposition to any agreement is vocal but the world’s desire for greater rapprochement is a strong force. Russia has weathered their own self-inflicted storm and appears to have gone quiet for now.
Energy prices, continued US dollar strength, and a genuine global GDP recovery are open questions. Our US stock market has stalled around levels first reached in late November 2014.
Should proxy wars in Syria and Yemen escalate oil prices could turn quickly and markets will be shaken. A nuclear arms race in the Middle East will be unsettling. More Russian bellicosity could derail the Euro recovery.
For the moment, however the trends of a stronger dollar, a rising Europe, an improving Japan and a steady China are holding in place. An Iranian- Western deal on their nuclear program has not hurt oil prices.
Low rates with low inflation and soon to continue rising earnings indicate stocks are the best choice for most investors. Signs of recession, an inverted yield curve, and an overheated economy are not far away from investors' minds but not imminent.
This recovery was never robust but will likely make up in length what is lacks in strength. We remain more invested in stocks than bonds. For the fourth time in 50 years the SPX yields more than the 10 year Treasury. We do not fear the pending interest rate rise and we see value in global stock markets and specific bond markets.
Doug Coppola
John Coppola
April 6, 2015
Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under
applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed
