The U.S. economy is currently mixed, some data points are strong and some have weakened. The great debate going on right now is whether:
- The U.S. is thawing out from a brutal winter and pent up demand is ready to be unleashed
or…
- The economic recovery is tiring and decreased Fed bond buying is at the root of the current slowdown
Let’s look at some current positive economic data points:
- The ISM non-manufacturing index increased to 55.2 in April from 53.1 in March
- The April jobs report crushed expectations, 288,000 non-farm jobs were created
- Personal spending jumped by 0.9% in March, which beat expectations for a 0.6% increase
And let’s list a few of the negative data points:
- Existing and new home sales were actually lower in March than in February, and lower than a year ago
- GDP growth slowed to just 0.1% in Q1 from 2.6% in Q4. This was much weaker than the 1.2% growth expected
- Consumer confidence fell to 82.3 in April, missing expectations for a reading of 83.2
The corporate earnings picture has also been cloudy in Q1 2014. 75% of the S&P 500 companies have reported and earnings have grown only 1.5% year/year while sales have grown 2.8% year/year. This slower growth is concerning, but we think weather is to blame. Look at some comments from large U.S. corporations citing the negative impacts from weather:
“Unusually severe winter storms throughout the quarter disrupted operations, decreasing shipping volume and increasing costs, and impacted year-over-year operating income by an estimated $125 million.” FedEx (Mar. 19)
“Severe winter weather resulted in weak sales trends across the food industry and our categories.” General Mills (Mar. 19)
“I now mention weather. It’s been all over, particularly in the U.S. Snow, rain, just crazy weather. We estimate that the weather impact to February sales results represented about a 1 percentage point hit to the four-week reporting period.” Costco (Mar. 6)
To summarize, it looks like severe weather caused a slowdown in both the economy and corporate earnings. So be it, but we’re now in the 2nd quarter and market fundamentals need to improve. We think they will and so does the Federal Reserve. The Fed is continuing to taper its bond purchases as they see signs of a strengthening economy. Through April the stock and bond markets are both positive.
- Stocks have crept up anticipating an economic and earnings recovery the remainder of 2014
- Bonds yields have fallen and bond prices have appreciated as investors reallocated to the relative safety of bonds during an uncertain 1st Q
In the current market environment yield, income and lower volatility asset classes tend to perform well. The Gradient Laddered Income, Absolute Yield and G50 portfolios have these characteristics and have performed well this year. For now, GI continues to recommend sticking with quality, dividends and income until the fundamental picture becomes clearer.
As of May 5th, 2014:
Dow Jones US Moderately Conservative Index is up 2.62% (TR) for the year
S&P 500 closed at 1,884.66 up 2.61% (TR) for the year
U.S. 10 year Treasury Futures are yielding 2.61% down 0.38% for the year
WTI Crude Oil futures closed at $99.56 up $0.86 for the year
Gold closed at $1,309 per ounce up $105 for the year
To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.