May 10, 2016
Monthly Market Summary – April 2016
The “risk-on” sentiment that sparked the global rally in mid-February continued through mid-April. The rally was driven by rebounding oil and commodity prices, a weaker U.S. dollar, and improving job and service sector data in the U.S. and Europe. Then sentiment shifted after several disappointing corporate earnings reports, an anemic report of first quarter U.S. gross domestic product growth of just 0.5%, and the International Monetary Fund cutting its global growth forecast to 3.2%. Despite some volatility during April, most major equity, corporate and municipal bond, and commodity indices posted a positive return for April. U.S. Treasury bonds posted small negative returns as yields moved back toward the high-end of the recent trading range.
In U.S. equity markets, the small-capitalization (cap) index had the best return for the month followed by the mid-cap index, and then the large-cap index. Value stocks outperformed growth stocks regardless of market cap due to the gains in energy and materials stock (value) and the declines in prices for many information technology and consumer discretionary stocks (growth). There continues to be a wide dispersion of returns among the ten industry sectors. The energy sector had the best return for the month in each of the three market cap categories with a double-digit gain in the mid and small-cap indices and an almost 9% return in the large-cap index. Energy stocks rallied in reaction to the 20% gain in the price of oil in April. The materials sector had the second best returns for the month as gold, silver, and industrial metal prices rose sharply. The financials and healthcare sectors were in the middle of the return range with low single-digit returns. The more defensive consumer staples, telecom, and utilities sectors had among the weakest results with almost flat or negative returns as investors favored higher growth sectors. Information technology was the poorest performing sector in the large and mid-cap indices. In the large-cap S&P 500 index, the information technology sector declined over 5% in reaction to several poor earnings announcements. One of the key reports that hurt the sector came from Apple Inc. Apple’s stock declined 14% in April after reporting its first sales decline in 13 years. Consumer discretionary was the poorest performing sector in the small-cap index with a return of -1%.
Market Indices – April 2016
The MSCI EAFE index of developed international country equities and the MSCI Emerging Markets (EM) index each had a positive return for the month. The developed international equity index outperformed both U.S. equity indices and the EM index. For the second consecutive month Brazil was a top performing country with a gain of 10% boosted by higher commodity prices but also in reaction to the possible impeachment of President Rouseff. Other oil producing countries were also at the top of the performance charts, including Canada, Norway, and Russia. India had a modest return of less than 1% despite the Reserve Bank of India lowering its benchmark interest rate to spur lending. China continues to be a weak market posting a slight negative return for the month. China’s economic growth slowed to 6.7% in the first quarter, which was the slowest rate since the first quarter of 2009. In both the EM and developed international indices industry sector results were similar to in the U.S. with energy and materials having the best returns and information technology having the lowest return.
The Barclays U.S. Aggregate Bond index had a return of 0.4% for April. Corporate bonds were the better performers posting positive returns as concerns about credit quality subsided. The Barclays U.S. Corporate High Yield index had the best return among the major fixed income indices for the month. The high yield index advanced along with the rally in oil prices since energy related credits are a significant portion of that index. All but the shortest maturity Treasury bonds declined for the month as the flight to safety trade reversed particularly early in the month. The benchmark 10-year Treasury bond had a yield of 1.83% at month-end up slightly from the prior month-end yield of 1.78%.
The Bloomberg Commodity index was the performance leader for April with a return of 8.5%. Each of the sub-indices we track except livestock posted a positive return. Silver had the best return up 16%. The energy sub-index had the second highest return for April at 13% as the price of oil rose to $45.96 at month-end up from $38.34 at the end of March. The price of oil rose sharply despite no agreement to limit production being reached at the highly anticipated Doha meeting of oil producers. One reason that oil prices continued to rise is that the International Energy Agency reported that it expects that supply and demand will be in balance by 2017. Natural gas prices also rose during the month, but at a more moderate rate than oil. The agriculture sub-index had a strong gain for April of 7% driven by higher grain prices which offset the negative return of the livestock index. Industrial metals also posted a return of 7%.
Vogel Consulting, LLC (Vogel) Tactical Recommendations
Because the economic and financial market conditions are generally unchanged from the prior month-end, no changes were made to the tactical asset allocation recommendations during April. We continue to recommend an equal weight position in each equity market sector (U.S. large-cap, mid-cap, and small-cap stocks as well as developed and emerging market equities). Corporate earnings and economic data have been mixed but the U.S. and other major regions are still seeing economic growth, albeit at moderate levels. Continued low interest rates and other accommodative monetary policies may help keep growth in a positive trend. However, valuation metrics such as price/earnings ratios on stock indices for different regions and market cap sectors are near or above historical averages which lead us to remain neutral on U.S. and global stocks compared to long-term strategic targets. We continue to favor hedge fund strategies over fixed income for the lower expected volatility portion of portfolios since yields are near historically low levels. Our fixed income recommendation is to underweight this sector and to maintain a focus on short to intermediate term bonds. Non-Treasury bonds are favored for the yield advantage they provide compared to Treasury bonds. As our expectation is for a moderate rate of inflation to continue, we recommend an equal weight to real assets. Finally, since we expect that financial markets will experience periods of wide swings up and down in reaction to changes in expectations to Federal Reserve interest rate policy, oil prices, and economic data reports, we continue to recommend using periods of market strength to raise any cash needed to support spending needs over the coming 12-24 months.
The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance. Past performance does not guarantee future results.
The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group. An index is not managed and is unavailable for direct investment.