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The hotly debated TPP - Trans Pacific Partnership is moving forward. This trade pact involving 12 countries would link 40 percent of the world’s economy and level the economic playing field, boosting jobs and growth. This is significant for the U.S economy as 95 percent of the world’s consumers are outside of the U.S. The U.S. currently has 20 trade pacts and, as reported in the WSJ on May 17, 2015, among those countries with deals in place, “exports have increased by 415% with Chile (trade pact in 2004); 378% with Mexico (1994); 111% with Canada (1994); 90% with Australia (2005); 84% with Singapore (2004); 74% with Central America (2006); 61% with Peru (2009); 42% with Colombia (2012) and 26% with Panama (2012) since the respective trade deals took effect.” An increase in exports is responsible for one million new U.S. jobs since 2009. Please follow trade on page 21 of the Voya Global Perspectives™ book.
The market is nervous ahead of the Fed’s minutes to be released today. Most investors believe that a June rate hike is off the table so why the jitters? Well the Fed did say a rate hike is data dependent and the data in the second quarter is definitely improving. Inflation or the lack of it had been a stumbling block but oil prices have rebounded and are close to $60/barrel. And the labor market is looking stronger than it has in 15 years. Although it is highly unlikely there will be a June hike, the market knows that Janet Yellen could just turn out to be a hawk in dove’s clothing. What should investors do? Stay diversified with a global portfolio of stocks and bonds. Please watch the Fed Funds Target Rates and U.S. Treasury Yields on page 40 of the GP book.
Leave it to Housing to wake up investors to how good the economy really is. Housing starts surged twenty percent in April, the highest since November 2007, and the biggest percent increase since 1991. Housing is a significant driver of jobs with its multiplicative impact on consumer discretionary spending which becomes a virtuous cycle that will further bolster jobs. Jobs and stronger employment are catalysts for, not only future homebuilding, but increased housing prices further bolstering consumer confidence. The markets have been showing how fast they can reverse on the expectation of better news and likely the first quarter abounding weakness will look more like an anomaly than a trend. Please see Voya Global Perspectives™ latest market outlook, “April Fools Abound as Market Catches Investors off Guard.”
Bond yields are at their highest level since December and have moved especially fast in the last couple weeks. What is causing the jump in U.S. and European bond yields? There are many possible reasons. The ECB unleashed a massive stimulus program to combat low growth and deflation risk. But growth is coming better than expected. And since then both the dollar and oil prices have moderated. Yet inflation is still not an issue. And central banks globally are still accommodative. Perhaps the low lows were just too low. Maybe bond investors are panicking given the Feds looming rate hike. Whatever the reason, there are still plenty of reasons to own bonds across the spectrum - corporate, high yield, senior loans, governments - for diversification and risk control. High yield and senior loans in particular tend to do well in a rising rate environment. Please see how they behave during rate hikes.
Over the last month investors have been fooled by sharp positive reversals in quarterly profits, crude oil prices, and European bond yields. European bond yields were driven lower when the ECB unleashed its huge quantitative easing initiative in March. The euro was also slammed. But since then the euro area economy has been upgraded, bond yields have soared, and the euro has regained strength. U.S. yields have also turned up sharply and the U.S. treasury 10 year bond is now yielding over 2.2 percent, the highest level this year. Higher yields are commensurate with a stronger economy. This is good news but the market will likely remain skittish, trading sideways, as it waits for further Fed clarification on the first interest rate hike since the recession. Tomorrow’s job report will be watched closely. A positive report will help investor confidence. But if it is too good, the market will be even more worried about a rate hike, potentially catching investors off guard again. Please read the latest Voya Global Perspectives™ commentary, “April Fools Abound as Market Catches Investors off Guard.”
Also, on Tuesday Doug Coté appeared on Bloomberg News to discuss overall first quarter corporate earnings. Despite a slow start, Cote said that “corporate earning are coming in way better than expected.” If you missed the appearance, watch it now.
Despite earnings that are coming in better than expected the market is still jittery. The latest ADP report was lighter than expectations showing that only 169K private sector jobs were added in April, the second straight month of sub-200K job creation. It is uncertain if Greece will be able to make its next debt payment due next week. And Fed Chair Janet Yellen’s interview today, where she stated equity market valuations are "generally quite high" and "there are potential dangers there,” certainly didn’t help matters. However, there has been some good economic news too. ISM Services (which are a much larger portion of the economy) came in at 57.8 percent, compared with 51.5 percent for the manufacturing index. The strong dollar, which has been blamed for many recent economic ills has paused, down more than 5 percent since mid-March and oil prices are now back over $60/bbl, the high for 2015. If the economic picture seems murky, let corporate earnings be your guide. They are growing and that is supportive of higher equity markets. Follow earnings growth on page 8 of the Voya Global Perspectives™ book.
That meager 0.2 percent preliminary increase in reported Q1 U.S. GDP could actually be in jeopardy. After today’s trade report the final GDP figure may be negative. The U.S. trade deficit soared 43 percent in March to $51.4 billion, the highest level since 1996. Imports surged 7.7 percent as the West Coast port standoff ended, unleashing a huge influx of goods, while exports were up a modest 0.9 percent reflecting the headwind of a stronger dollar. GDP is calculated as Consumption + Investment + Government Spending + (Exports-Imports). By the time the final report is released we will already be a significant way through the second quarter which is already showing signs of rebounding. Therefore the market impact will be minimal. Meanwhile, Eurozone growth is also looking brighter. Eurozone GDP growth forecasts have been upped to 1.5 percent, from 1.3 percent, for 2015. Please follow the trade deficit on page 21 of the Voya Global Perspectives ™ book.
So far, 72 percent of the companies on the S&P500 have reported their earnings and the news has been better than expected. What started out as expectations for a -5.0 percent year-over-year growth quarter has been chipped away by positive surprises, and the expected growth rate with 28 percent more companies to go is now essentially flat. The energy sector in particular has been negative but not as disastrous as anticipated. A few more big upside surprises and investors may again see a positive quarter of earnings growth, the fundamental driver of markets. A few weeks ago we warned investors about shunning diversification and putting all of their eggs into one basket. Another chicken analogy is appropriate here – don’t count your chickens before they’re hatched. Please follow earnings growth on page 8 of the Voya Global Perspectives ™ book.
After a down January, an up February, and a down March, U.S. markets will end April with a market gain. The market has moved forward this month based on fundamentals – namely corporate earnings. It looks like earnings forecasts may have been a little too pessimistic for Q1. Sell in May and go away is a popular saying but since 2009 the only negative May-December period was in 2011. In fact, investors who stayed invested in the S&P500 from May - December in these last six years of the bull market were rewarded with an average 10.5 percent return. Market returns are hard to predict and this year investors will be dealing with the uncertainty of when the Fed will raise rates, which will heighten volatility. Please follow market returns on page 27 in the Voya Global Perspectives™ book.