The 2014 – 2016 collapse in domestic oil prices and related investment spending has proved to be far greater in scale and duration than what had occurred in prior cycles. History shows that sharp and large declines in energy prices tend to result in a substantial deceleration in nominal GDP growth, which also impacts both investment and consumption channels. With most of the negative effects of the oil-price collapse already absorbed, the cash flow benefit to households, transportation companies and a wide swath of industrial companies is yet to be realized.
If we assume no further substantial drops in domestic oil prices and capital spending plans, then the vast majority of the negative effects have probably already been absorbed. It’s the beneficial effects of lower oil prices that have yet to be fully realized. As a result, we believe nominal GDP growth should accelerate through the end of 2016. Source, in part: AB Global.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). So far, first quarter corporate-earnings reports weren’t as bad as anticipated but certainly nothing to write home about. With first-quarter results in from 87% of the companies in the S&P 500, the earnings decline is expected to be 7.1%, according to FactSet.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 4. While decreased, these risks still deserve our ongoing attention.
Last week, Bonds increased and U.S. Stocks and Foreign Stocks declined. During the last 12 months, BONDS outperformed STOCKS.
Returns through 5-6-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.2
3.6
3.8
2.5
3.5
5.0
US Stocks-Standard & Poor’s 500
-.3
1.4
1.0
10.7
11.3
6.7
Foreign Stocks- MS EAFE Developed Countries
-3.0
-3.3
-11.8
.6
1.5
1.0
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss: “Financial Planning Considerations for Women”
Laurie will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Stocks fell last week in response to underwhelming quarterly earnings reports and disappointing economic data from the U.S. and China. Large-capitalization stocks outperformed small-caps. Fears about slowing global growth clipped cyclical stocks in sectors such as energy, mining, and industrials, which had led the market since the Feb. 11 low.
The Dow Jones Industrial Average eased 33 points on the week, to 17,740.63. The Standard & Poor’s 500 index fell 8 to 2057.14. The Nasdaq gave up 0.8% to finish at 4736.16.
The Labor Department said Friday that nonfarm payrolls rose 160,000 last month, below expectations of 205,000 additions and the lowest number of jobs added in seven months. The unemployment rate was unchanged at 5%. Wages rose a strong 2.5%. Separately, Labor said U.S. first-quarter productivity, or output per worker, declined 1%.
Robert Pavlik, chief market strategist at Boston Private Wealth, says the primary cause of market weakness was a drop in April manufacturing numbers, both in the U.S. and China, released at the beginning of the week. Continued softness in the U.S. dollar had been helping cyclicals, many with sales generated overseas. But “all of a sudden,” he says, the falling dollar was taken by some investors as a sign of U.S. economic malaise.
The data showed three things, none of which are good for cyclicals, says Jim Tierney, portfolio manager at AllianceBernstein: “The U.S. economy is pretty darn sluggish; wage inflation is creeping higher; and productivity is terrible.”
The deterioration in first-quarter earnings—and not just among energy companies—was also a factor, says William Nichols, a managing director at Cantor Fitzgerald. Companies are beating earnings expectations that had been lowered, but the top line remains challenged, he adds.
Many companies are topping earnings-per-share expectations, but the percentage of those beating revenue estimates is 53%, below the five-year quarterly average.
Now that the reporting season is just about done, investors will turn their focus to the June 15-16 Federal Open Market Committee meeting. Although a rate hike isn’t expected, they’ll be parsing Fed officials’ commentary before then. The market could tread water ahead of the meeting.
