May 30, 2017

Monthly Market Summary – April 2017

Investors around the world had a wide range of news to digest in April about corporate earnings, economic activity, and politics. The various news events led to periods of ups and downs in financial markets, but the month ended with positive returns for most major asset class indices, with commodities the main exception.

In the U.S., certain economic data disappointed investors. For example, light vehicle sales and the manufacturing and non-manufacturing purchasing managers’ indices (PMIs) declined.  Also, the initial estimate of first quarter gross domestic product (GDP) growth was reported as 0.7%, which was lower than expected, due to lower consumer spending.  However, the corporate earnings reporting season has been good.  The earnings for the S&P 500 companies is on track for a 17% jump for the first quarter.  About 70% of the companies that have announced had earnings per share above what analysts expected.  Another positive sign is that more companies are raising their guidance about future earnings than are lowering their guidance.  Information technology company earnings have been particularly good driving the technology company heavy NASDAQ index to new record highs.  The Russell 2000® index of small capitalization (cap) stocks also set a new record high late in the month.

Market Indices – April 2017

Outside the U.S. economic news was generally positive. The composite PMI for the United Kingdom (UK) surprised to the upside coming in at 54.9.  In Japan, the Tanken survey showed improved business conditions.  In the eurozone, retail sales rose a more than expected 0.7%.  Industrial production in China reached a 27-month high and both exports and imports rose sharply.  Corporate earnings news has been positive as well.  For example, a recent report noted that more European companies are reporting earnings above analysts’ estimates than below estimates.

Politics also played a major role in financial markets in April. Tensions about North Korea’s rhetoric about launching missiles and the responses by China, South Korea, Russia, and the U.S. pushed global equity markets lower during the middle of the month. However, global equity markets rallied after the results of the first round of voting in the French presidential election were announced.  Centrist candidate Emmanuel Macron gathered more votes than the anti-European Union (EU) candidate Marine Le Pen. Polls are predicting Macron to win the May 7 run-off vote.  A Macron win would mark a move away from the anti-EU populism that has been a concern since the UK voted to leave the EU last year and will likely reduce uncertainty about the stability of the EU.

In central bank news, both the European Central Bank and the Bank of Japan decided to keep their monetary policy steady at their April meetings to continue efforts to support economic growth.

Major U.S. equity index returns were mostly positive for the month of April with only the S&P 500 Value index posting a very small negative return. Small and large-cap stocks outperformed mid-cap stocks and growth stocks outperformed value stocks.  Similar to the prior month, information technology, consumer discretionary, and healthcare stocks were the top performing sectors as investors favored companies that can grow earnings without a boost from tax cuts or increased infrastructure spending.  Sectors generally considered value stocks, such as energy, materials, financials, and telecom had the lowest returns in April.  These sectors were pressured by diminishing expectations for quick and aggressive action on President Trump’s growth agenda and falling oil prices due to increasing supply.

Foreign equity market returns were positive for April and outperformed U.S. returns. The MSCI EAFE index of developed international market equities and the MSCI Emerging Markets (EM) index had returns for April of 2.5% and 2.2% respectively on a U.S. dollar basis.  Currency moves had a positive impact on the EAFE index return for U.S. investors as the dollar weakened modestly against the euro, pound, and yen.  On a local currency basis, the EAFE index had a return of 1.4%.  Currency had little impact on the EM index return.  Sector results in developed international and emerging markets were similar to results in the U.S. equity market.  Growth stocks outperformed value stocks and information technology, consumer discretionary, and healthcare were the top performing sectors.  The weakest sector in developed international markets was energy and in emerging markets was utilities.  On a geographic basis, among developed international countries, the euro area had the highest return on improving economic data and a positive reaction to the results of the first round in the French presidential election.  France was the top performing country index with a return of over 5%.  In emerging markets, emerging Europe had the highest returns.  For example, Poland and Turkey were each up over 11%.  Investors in Turkey pushed stock prices higher in reaction to the vote to approve a new constitution.  In comparison, Brazil and Russia had small negative returns hurt by the weakness in oil and commodity prices.  India and China each had a low single-digit return.

U.S. bond market returns were positive for April leading the Bloomberg Barclays U.S. Aggregate Bond index to post a return of 0.8%. Bond yields moved lower during the month (and prices moved higher).  The benchmark 10-year Treasury bond yield declined to end April at 2.29% down from 2.40% at the end of March.  Bonds with a longer time to maturity had better returns than shorter maturity bonds.  Corporate and municipal bonds generally outperformed government bonds as demand for the extra yield supported prices.

The Bloomberg Commodity index had a return for April of -1.5%. The livestock sub-index had a large positive return but each of the other sub-indices we track had a negative return for the month.  The petroleum sub-index had the lowest return.  Oil started the month at $50.74 and rose to as high as $53 early in the month after the U.S. missile attack on Syria but declined through the remainder of the month to end at $49.31.  Supply levels remain high since U.S. production has been increasing.  Gold was a bright spot in the commodity index gaining almost 2%.  However, the price of silver fell over 3% resulting in a small negative return for the precious metals sub-index.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

Three changes were made to our tactical asset allocation recommendations during April. We have raised our recommended allocation for international developed equity to equal weight.  We previously had an underweight recommendation since despite the signs of improvements in economic activity and corporate profits, there were significant political risks in Europe and expectations were for a strengthening U.S. dollar which would hurt international returns for U.S. investors.  However, the political risk in Europe has decreased after the first round of the French presidential election and expectations have diminished that the U.S. dollar will strengthen materially.  With improvement in economies around the world, the growth differential with the U.S. may be less than previously expected, which could limit the dollar’s appreciation.  To fund the increased weighting in international equity, we have adjusted our recommendation for hedge strategies to an underweight.  While we have retained an equal weight recommendation to real assets (real estate, infrastructure, and commodities) due to our expectation for a moderate level of inflation, we are recommending lowering exposure to real estate due to high valuations.  We suggest achieving this lower exposure by not reinvesting distributions received from current real estate investments and waiting to add new investments until more attractive entry points are seen.

Our tactical asset class recommendations include an equal weight position in U.S. large-cap, mid-cap, and small-cap stocks as well as in international developed and emerging market equities. Even though valuations are above average, economic data and corporate earnings are showing improvement and central bank monetary policies are still accommodative.  We recommend an underweight to hedge fund strategies and to fixed income.  We favor hedge fund strategies over fixed income for the lower expected volatility portion of portfolios since bond yields are near historically low levels and are likely to rise and bond prices fall as central bank polices are adjusted.  Recent comments by FOMC members continue to point to two additional rate increases this year.  Within fixed income we continue to recommend a focus on short to intermediate term bonds.  We also continue to favor non-Treasury bonds for the yield advantage they provide compared to Treasury bonds.  Since our expectation is for a moderate rate of inflation to continue, we recommend an equal weight to real assets.  We would not be surprised if financial markets experience bouts of volatility as more details emerge about any fiscal, monetary, or political policy changes or if there are delays in implementing these actions.  Therefore, 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.