Gasoline prices do matter. Today’s University of Michigan Consumer Sentiment Index was the best since January 2004 coming in at 98.2, far exceeding expectations of 94.4. Consumers are upbeat on what essentially has been a huge tax cut for them. Plunging oil prices also resulted in a steep drop in inflation. U.S. consumer prices fell 0.4 percent in December, the largest drop since the end of 2008. The market turned up on today’s economic data. Presumably because the fear of below target inflation may give the Fed pause in their quest to raise rates in 2015. Please follow oil prices on page 66 of the Global Perspectives book.
The market opened on a down note again. Today’s thorn in the market’s side is the spate of disappointing earnings from some of the big financial companies and a huge surprise from the Swiss central bank. The Swiss National Bank eliminated its cap on the EURO/CHS exchange rate sending the Swiss franc soaring. Is this a confirmation that markets will indeed see a huge round of ECB quantitative easing on January 22 (which will undoubtedly send the euro lower making it almost impossible for the Swiss to hold on to the peg)? Perhaps, but investors would be better served to concentrate on the Q4 earnings season which will heat up in the next couple weeks. Expected earnings growth for Q4 is now slightly negative. Compare this to the beginning of Q4 when expectations were for 9 percent growth. It remains to be seen if this severe slashing is warranted. If earnings come in better than expected the markets should settle down. In the meantime diversification is the defense that helps investors ride the wave of volatility. Please see an example of how diversification can reduce risk on page 72 of the Global Perspectives book.
It got ugly when Retail Sales reported, sending equity futures reeling. Why shouldn’t the market sell off? Especially since the expectation was for a slight gain of 0.1 percent but, instead was not only a negative 0.9 percent but, November’s strong number was revised substantially down. What the statistics don’t tell you is that retail sales were at an all-time record high last month of $447 billion for the month, December’s $443 billion was the third highest in history, and total sales for 2014 were up 4 percent from 2013. But, with low oil causing earnings to be slashed across the board and even in sectors that should benefit, like Consumer Discretionary, any bad data is causing investors to flee first and ask questions later. Please see the Retail Sales chart on page 13 of the Global Perspectives book for further insight into today’s numbers.
Also, if you missed Doug's appearance on CNBC's Squawk Box this morning, watch it here:
The year 2014 was lackluster for the real estate market. Prices, that were climbing at double digits in 2013, fizzled and the latest year-over-year price increase according to the Case Shiller Index was 4.5 percent. Additionally, the latest existing home sales figures tumbled 6.1 percent to a six-month low in November, the lowest level since May, after two straight months of strong increases. This is poised to change. Strong economic growth, the best job market in 15 years and the latest Washington FHA plan will boost the real estate market in 2015. The annual fees the FHA charges to guarantee mortgages will be cut by 0.5 percentage points, to 0.85 percent of the loan balance. Under this new premium structure, FHA estimates that 2 million borrowers will be able to save an average of $900 annually over the next three years if they purchase or refinance homes. First time home purchases and refinancing activity are expected to increase sharply after this plan takes effect at the end of January. Speaking of real estate, REITs were the best performing asset equity class last year. Global REITS returned 15.9 percent and US REITS returned 25.3 percent. Please follow a diversified portfolio of stocks and bonds on page 5 of the Global Perspectives book.
First the good news. The U.S. added 252K jobs in December, the 11th straight month of plus 200K job growth - the longest streak in almost 20 years. Additionally, November’s stellar report was revised up to 353K and October was also revised up to 261K.As a result, the U.S. unemployment rate fell to 5.6 percent, the lowest level since June 2008. In 2014 a total of 2.95 million jobs were created, the most since 1999. However, there was some bad news in today’s non-farm payroll report. The labor participation rate ticked down slightly and average hourly wages actually fell. The overall wage gain in the last year has only been 1.7 percent and since 2010 has only averaged 2 percent. Without wage gains, inflation is likely to remain below the Fed’s target and may temper the Fed’s plans to raise interest rates mid-year.Please follow job creation on page 56 of the Global Perspectives book.
Deflation fears significantly raised the prospect for the European Central Bank (ECB) to announce or initiate quantitative easing (QE) at their January 22nd meeting. This initiated a global market rally as expectations increased for a massive bazooka-style monetary stimulus injection. The catalyst was Wednesday’s announcement by the European statistics office of deflation in December for the 18-country Eurozone. Headline prices were 0.2 percent lower than a year ago, the first deflation reading since October 2009. In 2015 Central Bank actions on rates continue to be an important driver to markets. Please see Global Perspectives 2015 Forecast on rates.
The labor market is the center of the economy. If consumers have jobs the rest falls into place, so the December ADP private payroll report was welcome good news this morning. Private-sector employment gains accelerated in December. Non-government employers added 241,000 jobs and November’s prior estimate of 208,000 jobs was revised up to 227,000 jobs. We know that one out of four jobs added since the recession has been related to energy, but so far the drop in oil prices and projected pull back in that sector has not yet translated into slower jobs growth. This positive ADP report bodes well for the more encompassing nonfarm payroll report due on Friday and may help settle recent volatility in markets. Please follow market volatility as measured by the VIX on page 35 of the Global Perspectives book.
Collapsing oil with no bottom in sight is spilling into the financial markets. The magnitude and speed of the drop in oil prices suggests a steep supply and demand curve which means a little oversupply can send prices plummeting; but keep in mind it works both ways and the prices can reverse just as fast. No, we are not saying they will go back to the highs, but we are saying that oil prices could reverse quickly on any news that suggests a scaling back of production or a surprise increase in demand. Low oil prices have also been a positive price shock for consumers and manufacturers around the world especially in high consuming nations like the U.S. Markets reward investors not speculators and this too shall pass. Please see the Global Perspectives 2015 forecast that details the resilience and sustainability drivers in the markets.
Well, the markets sure delivered a Santa Claus rally. Those sleigh bells were ringing big for small cap stocks up 4 percent for the month and an astounding 11 percent for the quarter! The rally carried some coal in the stocking as fourth quarter corporate earnings estimates were slashed from 9 percent to 2.6 percent, led by carnage in the energy sector. Fundamentals drive markets so we advise investors to be effectively diversified going into 2015. Please see Global Perspectives Effective Diversification on page 5 of the Global Perspectives book.
Santa sure delivered on GDP. The US economy grew at a 5 percent real annual rate in the third quarter, up significantly from the estimate of 3.9 percent. This third quarter rate is the highest pace of US growth in 11 years and was due to an unexpectedly strong revision in consumer spending. Business spending also kicked in and was revised higher with fixed nonresidential investment in structures up 4.8 percent pace in the third quarter and contributing 1.1 percentage points to the quarterly growth rate.
Another reason not to pout – after the latest rally the fourth quarter market returns are now the best of the year. As of 12/22 the S&P500 is up 5.9 percent for the quarter and 14.7 percent for the year. The season looks merry and bright. Ho Ho Ho!
Happy Holidays from Voya Global Perspectives!