Auto sales are up in February but are coming in shy of expectations. Surely the harsh winter weather is a factor, especially in the Northeast. But consumers generally still don’t believe the lower oil prices are anything more than a temporary blip and, as a result, have yet to seriously ramp up their spending. Spending on energy was down 18 percent in January and consumer spending was down 0.2 percent overall. Consumers used their energy windfall to boost their savings accounts instead, and the savings rate rose from 5 percent to 5.5 percent, the highest since 2012. The current low oil scenario is not a blip. The blip in energy prices was the plus $100/barrel oil consumers have been living with the last few years. More supply and less demand have been working to erode energy prices for quite some time. Please see the Voya Global Perspectives™ energy whitepaper written in 2012, outlining the case for lower oil prices.
Fourth quarter GDP was revised down from 2.6 percent to a 2.2 percent. Weak exports and lower than initially reported inventory stocking, were the reasons for the downward revision. This shouldn’t come as a surprise given the strength of the U.S. dollar. But, before investors throw their arms up in despair at the tepid rate of U.S. growth, they should take a look at some of the bright spots. Consumer spending increased 4.2 percent. This is indeed solid evidence that the, game-changing 70 perecnt of the economy, consumer remains resilient and that cheap gas will continue to bolster spending in 2015. In addition, Capex (capital expenditures) were significantly bumped up to 4.8 percent despite the fact that any Capex related to the oil sector is under pressure. Capital spending is crucial because it begets more jobs and hence more consumer spending. Overall GDP for 2014 ran about 2.4 percent; higher than 2.2 percent in 2013 and 2.3 percent in 2012, so we’ll take it. Please follow GDP on page 62 of the Voya Global Perspectives™ book.
Durable goods orders rose 2.8 percent in January, the biggest increase in six months. Business spending (less the volatile defense and transportation sectors) was also a positive surprise, increasing 0.6 percent after four months of decline. In other important economic news, January posted the third straight month of consumer price drops – primarily due to falling gasoline prices. Core CPI was down 0.1 percent year-over-year. Investors should not worry too much about deflation. A decline in energy prices is the good type of deflation and, as gas prices stabilize, inflation should gradually move towards the Fed’s target. So this report is unlikely to deter the Fed and its rate hike time table. Please follow inflation on page 64 of the Voya Global Perspectives™ book.
A recent deal gives Greece a four month $273 billion extension. However, Greece is certainly not out of the woods yet. Creditors have serious doubts that Greece will be able to adhere to the terms of the bailout but European markets don’t look too concerned. The euro zone has been in rally mode this year despite the Greek drama. The MSCI EAFE index is up double (6.2 percent as of 2/24,) compared to the S&P 500 (up 3.1 percent as of 2/24,) so far this year and many of the major European stock indices are at all-time highs. And, why not? The ECB is has significantly ramped up their stimulus efforts and the euro is down to trading at 1.14/$, boosting export driven economies like Germany. Top it off with cheaper oil and the equity markets are happy to join the party. Keep your eye on the European stock markets on page 49 of the Voya Global Perspectives™ book.
The market is dissecting every word of Fed Chair Janet Yellen’s testimony today to determine when we may or may not see the inevitable first rate hike. The labor market is key to the decision and although job growth has been strong, the sluggish wage growth and low labor participation rate are monkey wrenches the Fed has in its pocket if needed. Yellen also mentioned the slow recovery in the housing market as a potential reason to hold off on rate movements. Today the Case-Shiller home price index came in a little better than expected for December with prices ticking up 4.5 percent year-over-year in the 20 metro city areas. Bear in mind, this is more than twice the rate of inflation. However, home sales have disappointed as of late. Existing home sales fell 4.9 percent to 4.82 million in January, a larger than forecasted decline. Despite no significant news in Yellen’s testimony, equity markets seem to like the somewhat dovish tone with many indices reaching multi-year intraday highs. Please see the latest Voya Global Perspectives™ comments on interest rates in "Wall of Worry Punishes Market in January."
Earnings season for the fourth quarter is winding down and growth reports have been better than anticipated at the beginning of the quarter. With about 88 percent of the companies on the S&P500 reporting, earnings have grown 3.8 percent over the same period a year ago. That’s the good news. However, there is some potentially negative news looming. Earnings for Q12015 are projected to report negative 5 percent growth when compared to a year ago (Q12014). Leading the decline is a projected 63 percent plunge in energy sector earnings. Earnings forecasts are constantly changing so it’s too early to sound the alarm bell. But, it underscores the need for investors to remain globally diversified even when the bull is running. Please see an example of global diversification on page 5 of the Voya Global Perspectives™ book.
Oil is consistently in the headlines because it is a key economic driver of the global economy. But in the future water may be the new oil. Many investors are not aware of the severe drought conditions here in the U.S. – not just other parts of the the world. California's current 4-year drought has resulted in the worst conditions in 1,200 years. The quest for water has driven some California cities to explore desalination techniques in order to use the ocean water as a potential supply (see WSJ 2/18/15 page A3.) This process is expensive but ongoing technological advances should bring cost down. The need for usable water is prevalent across all business sectors, not just agricultural concerns. Technology firms, for example, need substantial quantities of water to keep their servers cool. The fracking process which has spurred a U.S. energy revolution is also extremely water intensive. And not to mention, it takes 8 gallons of water to make one gallon of beer. Please see the Voya Global Perspectives™ 2015 Forecast where we introduce the tectonic shift to water.
Investors are anxiously awaiting the release of the Fed’s FOMC minutes today to gauge how soon they can anticipate a rate hike. So far this year the 10 year treasury yield has moved up to about 2.1 percent from 1.6 percent at year end. The bond market is aware that a zero interest rate policy is not appropriate in this economy and investors should not obsess about an interest rate hike – it will happen eventually. Bonds are appropriate in a portfolio because they provide diversification and risk control as well as income. Senior Loans in particular should do well in a rising interest rate environment because their interest rate floats. So far this year Senior Loans have posted a return of 1.25 percent while some other bond classes have been negative. In past rising interest rate regimes senior loans have done exceptionally well. Please see page 38 of the Voya Global Perspectives™ book for a historical view of senior loans and interest rates.
The surging dollar will produce winners and losers. Companies that are more domestically oriented will not feel the pinch of the strong dollar as much as those positioned in the international arena. This means mid and small caps will be better insulated than large caps which tend to depend more on international customers and exports. If sales growth shrinks, earnings will naturally feel the squeeze too and earnings are the driver of the markets. But, on the other hand, a strong dollar will make the U.S. equity markets more attractive to foreign investors, providing both capital and currency appreciation opportunities. European manufacturers will benefit as the euro is now at a multi-year low against the dollar making their goods more attractive. Mining companies will also get some lift that will buffer them against the fall in commodity prices because they sell their goods in dollars but pay costs in local currency. Emerging markets are worried about a Fed rate hike and its effect on their dollar denominated sovereign bonds but, the strong dollar and low oil have been helping their economies grow stronger. An investment environment with so many potential outcomes favors strong active management and broad diversification. Please review asset class correlation on page 68 of the Voya Global Perspectives™ book; negative or near zero correlations offer the best diversification benefits.
Retail sales declined 0.8 percent in January primarily because of a whopping 9.3 percent decrease in gasoline sales, the biggest drop in six years. But core retail sales which exclude gasoline and auto sales were also disappointing, ticking up only 0.2 percent. Clearly consumers are not sinking all of their gas savings windfall into retail goods just yet. However, this report was not entirely negative. Restaurants and drinking establishments posted a 13.1 percent surge suggesting consumers are not averse to spending the extra cash. Perhaps consumers just need a little time to get used to low oil prices. In addition, year-over-year sales are 3.3 percent above January 2014 and total sales for the November 2014 through January 2015 period were up a solid 3.8 percent from the same period a year ago. The encouraging pace of job growth will boost consumer spending which is 70 percent of the economy. Please follow retail sales on page 13 of the Voya Global Perspectives™ Book.