May 2015

THE MONTH IN BRIEF
Stocks wavered in April, with the S&P 500 ultimately rising a decent 0.85%. Investors were cautious, readjusting their assumptions about the strength of the economy and the Federal Reserve’s timing for raising interest rates. Oil prices soared. While Q1 GDP and the latest hiring figures were unimpressive, there were nice gains for consumer spending and retail purchases. The pace of existing home sales picked up while new home sales slipped. Headlines about Greece and China weighed on U.S. equities at mid-month. The market was still choppy, but less so than it had been in March.¹

DOMESTIC ECONOMIC HEALTH
Was the economy doing well? Or not as well as commonly believed? Last month, two headlines emerged that affected investor perceptions.

For the first time in a year, the economy added less than 200,000 jobs in a month: payrolls grew by 126,000 in March according to the Labor Department. In addition, 69,000 hires were retrospectively subtracted from January and February hiring totals. The headline unemployment rate stayed at 5.5% in March, with “total” unemployment (the U-6 rate including the underemployed) at 10.9%. ²

The federal government’s first estimate of Q1 GDP was just 0.1%. Analysts polled by MarketWatch had forecast 1.1% expansion. In Q4 2014, the economy grew 2.2%. ³

Countering these news items, personal spending improved 0.4% in March while retail sales rose 0.9%. Although the Commerce Department reported no personal wage growth in March, word came that the federal government’s employer cost index rose 0.7% in Q1 (those costs include wages). Both the headline and core Consumer Price Index were up 0.2% for March.^{.3,4 .}

News of rising oil prices and reduced hiring may have impacted consumer outlooks. While the University of Michigan’s consumer sentiment index rose 2.9 points in April to a mark of 95.9, the Conference Board’s consumer confidence index fell 6.2 points to 95.2.^{.3 .}

The manufacturing sector looked a bit tepid: U.S. industrial production had fallen 0.6% in March, and the Institute for Supply Management’s manufacturing PMI stayed at 51.5 in April. ISM’s service sector PMI came in at 56.5 for March, 0.4 points below its February mark. ^3,5

With energy costs rising, producer prices increased 0.2% for March, as opposed to the 0.5% retreat seen in February. After going negative for four straight months, headline durable goods orders increased by 4.0% in March. ^4,6

The latest Federal Reserve policy statement acknowledged paltry Q1 growth and the disappointing March jobs report, yet Fed officials maintained their view that “economic activity will expand at a moderate pace” in the near term. In other words, an interest rate hike in mid-2015 was improbable but not impossible. ^7.

GLOBAL ECONOMIC HEALTH
The odds of Greece making its upcoming €200 million payment to the International Monetary Fund seemed to lengthen, even with the IMF extending the deadline to May 6. The Syriza party announced it would stick to its commitment to fully fund Greek social welfare programs and termed the austerity measures implemented as part of the IMF bailout “crimes”. A Grexit could happen in May and the Greek economy – which has already endured the worst recession recorded in any country since the Great Depression – could sink further. As for the broad euro area, its jobless rate remained at 11.3% with consumer prices expected to be unchanged for April after a 0.1% dip for March. ^8,9

Many In China, securities regulators discouraged margin lending in mid-April as small investors were borrowing dangerous amounts of money to buy stocks in a runaway bull market. New rules permitted fund managers to lend shares for short-selling, and investors were allowed to short a greater number of stocks. These developments prompted a brief global selloff on April 17. ¹⁰

HSBC’s final April factory PMI for China showed contraction at 48.9, pointing to a distinct slowdown and perhaps a need for added stimulus. Markit’s April factory PMI for the euro area declined 0.2 points from its March level to 52.0. ¹¹

WORLD MARKETS
The multi-country Dow Jones and MSCI indices all posted April gains. Leading the way, the MSCI Emerging Markets Index rose 7.51%. The Asia Dow improved 4.99% last month, the Europe Dow 3.82%, the Global Dow 3.23%, the MSCI World Index 2.16% and the Dow Jones Americas 1.17%. ^1,12

In Europe, Russia’s ever-volatile RTS index soared 16.91%. Smaller monthly gains came for the U.K.’s FTSE 100 (2.77%) and France’s CAC 40 (0.26%); monthly losses came for Spain’s IBEX 35 (1.18%), Italy’s FTSE MIB (0.48%) and Germany’s DAX (4.26%).^,1

Turning to the Americas, Argentina’s Merval gained 11.19%, Brazil’s Bovespa 9.93%, Mexico’s IPC All-Share 1.96% and Canada’s TSX Composite 2.16%. In the Asia Pacific region, April brought losses of 1.72% for Australia’s S&P/ASX 200 and 3.38% for India’s Sensex, but also gains of 4.22% for South Korea’s Kospi, 1.63% for Japan’s Nikkei 225, 18.51% for China’s Shanghai Composite and 12.98% for Hong Kong’s Hang Seng. ¹

COMMODITIES MARKETS
Oil was the big story here. WTI crude ascended 25.86% during April, finishing the month at $59.63 on the NYMEX. Heating oil and unleaded gasoline saw respective gains of 15.62% and 15.60%. Additionally, April saw a 3.25% improvement in natural gas futures.^13.

Away from the energy sector, there were big gains for some crops and a loss for the U.S. Dollar Index. Cocoa prices were up 9.10% for the month; sugar prices rose 7.72%, cotton prices 7.58%. Coffee went +3.43%, soybeans +0.59%, corn -3.46% and wheat -8.46%. The USDX retreated 3.97% to a close of 94.60 on April 30. Copper logged a 5.04% gain for the month, and platinum rose 0.90%; gold lost 0.02% and silver 3.04%. Gold ended April at $1,182.40 on the COMEX, silver at $16.15.^.13,14.

REAL ESTATE
The housing market approached its busiest season with momentum. Existing home sales rose 6.1% for March with the annualized pace hitting an 18-month peak, the National Association of Realtors reported. Existing home prices were up 5.1% year-over-year according to NAR; the 20-city S&P/Case-Shiller home price index measured their annualized improvement at 4.2%. NAR’s pending home sales index followed its 3.6% February advance with a 1.1% gain for March.^3,15.

Three other housing indicators went negative in March, however. New home sales fell 11.4%, but they were still up 19.4% compared to a year ago. The Census Bureau also found housing starts down 2.0% in March, and building permits down 5.7%; in annualized terms, starts were down 2.5% but permits up 2.9%. ^16,17

Freddie Mac’s April 30 Primary Mortgage Market Survey found the average interest rate on a conventional home loan down just 0.01% from March 26 at 3.68%. Rates on 15-year FRMs declined 0.03% to 2.94% and rates on 5/1-year ARMs dipped 0.07% to 2.85%; rates on 1-year ARMs rose 0.03% to 2.49%. ¹⁸

LOOKING BACK…LOOKING FORWARD
April saw a notable contrast between the big three and the Russell 2000. The Dow, Nasdaq and S&P posted respective monthly gains of 0.36%, 0.83% and 0.85%, yet the Russell fell 2.61%. The CBOE VIX also had a down month, losing 4.84%. At the close on April 30, here was where all five indices stood: DJIA, 17,840.52; COMP, 4,941.42; SPX, 2,085.51; RUT, 1,220.13; VIX, 14.55. Paralleling the climb in energy futures, the PHLX Oil Service Index gained 17.07% for April. ¹

Sources: online.wsj.com, bigcharts.com, treasury.gov – 4/30/15 ^1,19,20

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.These returns do

not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

As May unfolds, perceptions of the economy (and what the Fed will do to manage it) have subtly changed. Analysts at Citigroup and Bank of America Merrill Lynch now believe the Fed will probably wait until December to adjust interest rates, and questions are emerging about how robust the economy really is. When the Fed was aggressively buying bonds, Wall Street could accept subpar economic growth – but after the March hiring dip and the disappointing initial Q1 GDP estimate, bulls are less enthusiastic about how 2015 may play out. Still, this year may mirror 2014 – a bad first quarter, better subsequent quarters, and ultimately solid yearly returns for stocks. If hiring, consumer spending and other fundamental indicators are decent or better and corporate profits beat (reduced) expectations, a bit of a tailwind may help the aging bull market.²¹

UPCOMING ECONOMIC RELEASES:

Among the notable news items for the rest of May, we find ISM’s April service sector PMI (5/5), the April ADP employment change report (5/6), the April Challenger job-cut report (5/7), the Labor Department’s April employment report and March wholesale inventories (5/8), April retail sales and March business inventories (5/13), April’s PPI (5/14), April industrial output and the preliminary May consumer sentiment index from the University of Michigan (5/15), April housing starts and building permits (5/19), the minutes from the April 29 Fed policy meeting (5/20), April existing home sales and leading economic indicators from the Conference Board (5/21), the April CPI (5/22), May’s Conference Board consumer confidence index, April new home sales and hard goods orders and March’s Case-Shiller home price index (5/26), April pending home sales (5/28), and then the final May University of Michigan consumer sentiment index and the second estimate of Q1 GDP from the Bureau of Economic Analysis (5/29). April consumer spending figures arrive on June 1.