Stock & Bond Market Analyses (4/20 - 4/24)

Stock Market Analysis

It was a profitable week on Wall Street. Large and small stocks, as measured by the S&P 500 and Russell 2000, respectively, both gained over 1%. The biggest advances occurred in Technology and Cyclical issues while Non-Cyclical and Energy stocks lagged. Volume was relatively steady throughout the week.

It appears the market is returning to its theory that bad [economic] news is good news [for stocks]. Under this theorem it is believed poor economic tidings will stay the Federal Reserve’s hand on raising interest rates. With this being a pre-election year it has always been our contention that any FED hikes would be few anyway.

Among the recent poor economic data includes a spate of Federal Reserve reports from Chicago, New York, Virginia, Kansas City and Dallas. All of these reports are negative and are indicating sluggish new sales. Only Philadelphia is showing signs of promise.

New homes sold are also an important item. A new home provides over 2 full-time jobs while it is being built. Further, it must be furnished and maintained. This creates additional economic activity. Last month’s sales were down over 11%. Although weather is being blamed, it should be noted that the previous month, chilly February, actually enjoyed the best sales numbers since 2008.

Finally, we note Capital Goods orders (excluding air and defense) declined. This is significant as such orders often represent business spending to improve their companies. Such spending has now declined for seven consecutive months; an ominous sign that, again, may help stay the Fed’s hand.

However there is some good news as well. It is earning’s season and roughly 40% of the S&P 500 companies have reported. Generally, the profit numbers have been good. Data, according to Bloomberg News, suggests over 3 in every 4 companies reporting have exceeded expectations. Smaller stocks are performing admirably as well and, so far, have seen double-digit earning’s growth. Good numbers.

There are some concerns for stocks. Valuation levels remain elevated. The latest PE on the S&P 500 is over 18 (compared to its 10 year average of 16.4). Additionally the stock market is worth more than our entire economy. Historically this is quite pricey.

Another sign for caution are the sales numbers. While profits have been surprisingly solid, actual growth in sales have only been a meager 0.25%. In many cases these poor sales numbers are being blamed on the strong dollar. The strong dollar has been suggested as a factor on why international sales have been so lack-luster.

Presently our leading intermediate indicators are roughly neutral. In our current environment the true key is stock selection. Investors should look to favor good bargain stocks (stocks that enjoy good relative value, profitability and price strength). Further, diversification is highly recommended, not only between the differing sectors but among size classes as well. Overall we would recommend investors maintain moderate equity levels at this time.

David W. James, CFA

Bond Market Analysis

U.S. Treasury bond yields rose and prices fell last week. The U.S. Treasury yield curve steepened with 30-Year U.S. Treasury yield rising about 10 basis points while the 2-Year U.S. Treasury yield increasing less than one basis point.

The U.S. dollar dropped about a half of one percent during the week but is still up about 10% against the Euro in 2015. Despite the drop in the U.S. dollar, gold, silver, and crude oil prices also fell during the week.

U.S. economic data was disappointing this past week. The first report of the week, the Chicago Fed National Activity Index was negative, indicating slowing economic activity. Additionally, the prior Chicago report was revised to an even more negative number. The last report of the week, the Durable Goods report, also missed expectations. Capital Goods New Orders have now fallen for seven months. The change in New Orders is also negative now over the past year. Weak orders for business equipment are especially troubling, as the link with future employment is clear.

During the month of March, the U.S. housing market had mixed success with existing home sales up 6.1% but new home sales were down 11.4%. Mortgage Applications to purchase a home were up about 5% on the week as 30 year mortgage rates dipped to 3.8% on average.

New home prices continue to rise, even though there are far fewer new homes being sold. The homebuilders have been reducing their building activities in order to meet the lower demand.

Along with the drop in gasoline prices, new electric car prices have been falling. Edmunds.com is reporting that sales of new electric cars and hybrids are at their lowest level since 2011. Used model prices have also been falling with some selling for less than half of their original purchase price. The large federal tax credits used to offset the initial inflated purchase price is now showing up in lower resale prices. Lower consumer price inflation is generally favorable for bond investors.

Our leading intermediate bond indicators remain neutral on bonds. In this environment we continue to recommend investors maintain moderate durations in high quality bonds.

Matt Watson, CPA