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.
U.S. economic growth slowed significantly in the first quarter, posting its poorest showing in a year. Bad weather, a strong dollar , a slowdown in oil and gas drilling, and a significant west coast port closure seem to be the main culprits. Growth was a meager 0.2 percent in Q1. Not surprisingly, exports were down 7.2 percent, based on that stronger dollar. But the consumer was somewhat disappointing. Although the consumer was the main driver of growth, consumer expenditures only rose 1.9 percent, down from 4.4 percent in the prior quarter as consumers are still reluctant to spend their gas savings windfall. Similar to last year, expectations are for a reacceleration as we move through the year. Please follow GDP on page 62 in the Voya Global Perspectives™ book.
U.S. Treasury bonds are currently yielding 1.94 percent, 60 basis points above Italy’s 10-year treasury bonds. The ECB’s trillion euro quantitative easing/bond buying program is driving European yields down. And it is the relative-yield trade between low-yielding euro zone bond markets and U.S. Treasuries that is keeping the lid on U.S. rates. Investors who have shunned bonds, fearing rising rates, have missed opportunities as bond indices across the board – with the exception of global bonds – have positive returns YTD. In fact, high yield bonds and long U.S. Treasuries are up higher than the S&P500 (YTD as of 4/27/2015) and corporate bonds are not far behind. When is the best time to own bonds? All of the time, as they offer diversification and risk control to a well balanced portfolio. Please follow fixed income performance on page 36 of the Voya Global Perspectives™ book.
Some recent retirement statistics are just plain scary. According to the Center for Retirement Research at Boston College the average retirement savings of those in their 60’s is $111,000. This is hardly the nest egg needed to live on for perhaps 30 years. Retirees will need to continue to grow their nest egg while taking income distributions and, therefore, will need exposure to equities not just bonds. Luckily the financial industry is aware of this need and has developed some innovative, income generating, multi-asset products that are designed to allow investors to have their cake while eating it too. Please check out the latest retirement savings outlook on page 77 on the Voya Global Perspectives™ book.
This is the biggest week for Q1 earnings reports. Most of the news has been better than expected. That is because expectations were essentially in the basement. Earnings expectations plunged for two reasons. The stronger dollar will negatively impact the sales and earnings of companies doing business internationally. And, lower oil prices will severely affect the earnings of the energy sector. So far one third of the companies in the S&P500 have reported, and earnings are 7.2 percent higher than last year. So far so good. However, expectations are still for a quarter of negative growth. If this does come to pass, it will be the first quarter of negative growth since third quarter 2012. Keep an eye on earnings growth by sector on page 28 of the Voya Global Perspectives™ book.
After a winter in the doldrums, the housing market is showing signs of life. Sales of existing homes surged 6.1 percent to a 5.19 million annual rate in March, the quickest pace in 18 months. Credit is still tight, but when it comes to home buying the most important factor is employment. The best job market in 14 years will continue to support the housing recovery. Please follow existing home sales, new home sales, and housing starts on page 59 of the Voya Global Perspectives™ book.
This week a flurry of earnings reports will dominate markets. Investors caught up in all of the corporate news may miss an important economic development brewing. Japan's prime minister announced that the U.S. and Japan are close to a major agreement regarding the TPP. The TPP is the Trans-Pacific Partnership, a free trade agreement 10 years in the making, which would strengthen economic ties with Japan, Singapore, Malaysia, Australia, Vietnam, Chile, New Zealand, and Brunei – countries that currently account for more than 10 percent of U.S. trade. The goal of this pact is to bolster future economic growth and American jobs as well as counter China's growing influence, but it will undoubtedly be met with opposition as the North American trade agreement was 20 years ago. Please see the Voya Global Perspectives™ 2105 Forecast, where we discuss the tectonic shift – global trade.
Global diversification works when you least expect it. Emerging markets have been underperforming the last few years, leading investors to shy away from them and stick with large company domestic equities. And, why not? The Fed’s taper increased volatility and caused a huge outflow of funds from these markets, emerging market currencies have been under pressure, and to top it all off global growth is slowing. Yet, the MSCI Emerging Market Index is up 9 percent so far this year. China, the biggest constituent in that index, is up 30 percent despite yesterday’s GDP report showing growth decelerating to 7 percent, the slowest since the recession ended. Global central bank stimulus and low oil prices are fueling the emerging market revelry. Investors herding into U.S. large caps have been rewarded with a comparatively puny 2.9 percent YTD. The tricky thing about putting all of your eggs into one basket is that it only works if you pick the right basket. Please review the latest Voya Global Perspectives™ market commentary.
Investors looking for firm economic footing won’t find any comfort in today’s manufacturing numbers. Industrial production dropped 0.6 percent for the month of March, the biggest decline since August 2012, and the first quarter was down 1 percent annualized, the first quarterly decline since the end of the recession. The Empire State manufacturing number was also a miss, falling sharply to negative 1.2 from 6.9 in March. However, the market responded positively so far today. Perhaps the recent round of soft data has investors thinking a June rate hike is now off the table. Please follow industrial production on page 11 of the Voya Global Perspectives™ book.