Stock Market Analysis
It was a profitable week on Wall Street with large stocks such as those in the S&P 500 gaining 0.4% and smaller issues such as the Russell 2000 advancing nearly 0.6% on a total return basis. The best performers were generally found in the Healthcare and Financial sectors while Utility and Energy stocks fell by around 1%.
Our research has previously identified the differences between early morning trades, which are often more speculative and emotional and late in the day trades where initial reaction to news and economic releases is more measured and rational. What has happened so far in May? In the first half hour of trading the Dow has been pushed higher by over 300 points. In the last hour the Dow gained only a pedestrian 41 points. The upward charge has been led by the speculators.
Seasonal factors are also starting to work against the market. The old adage of “Sell in May and GO AWAY” still remains generally true. Historically, the time from the beginning of May through Halloween underperforms. Since 1951 stocks have only averaged an annualized 1.6% during this time. By contrast during the “Buy” months of November through April (inclusive) the stock market typically advances a more robust 13.4% annualized. Certainly there are exceptions. The previous two years are examples of this, but generally these lackluster months are more challenging.
The employment report was a mixed bag of hope and disappointment. On the positive side the unemployment rate hit its lowest level since 2008. Job growth, while below Wall Street expectations, once again topped 200,000. This is a streak that has now occurred in 13 of the last 14 months. Also encouraging is the return of the entrepreneur class -- we saw a rise in self-employed.
Balancing this good news we now see a record number of adults who are no longer in the workforce; an ominous sign. One illustration of this is over the last five years our adult population has increased at a faster rate (over 1.6 million people) than our country’s job gains. There also is the issue of the quality of the jobs. Over the past 12 months our economy has created about 3 lower wage jobs (such as temp workers) for every higher wage job. The last month this ratio touched over 7-to-1. Certainly this is a trend moving in the wrong direction.
Presently our leading intermediate and our short term indicators continue to deteriorate and suggest increased risk levels. With that said, our longer term indicators, such as the presidential election cycle, remain in the favorable camp. This suggests we may see increased volatility ahead even as the prospect of a 2008 style decline with stocks falling over 40% is unlikely.
David W. James, CFA
Bond Market Analysis
This week short rates declined while longer bond yields rose. Thus, the 30-Year Treasury yield rose 8 basis points to 2.90% while the 1-Year Treasury yield fell 2 basis points.
Meanwhile the dollar weakened slightly against most currencies excepting for the Chinese Yuan, the New Zealand dollar, and the Korean Won.
Year-to-date, stocks (the Dow, that is) has risen by just over 2% for a neutral aspect. With increasing short term bond prices and falling long term prices, financial stocks are up 0.6%. Utility stocks are often paired with bonds and financial issues. They have also lagged this year, and are off nearly 6%. Utility stocks have enjoyed an irregular bull market starting at the end of 2012, and special strength in 2014, when bonds were king.
Spreads between yields on different bonds can give insight into risk perceptions. Thus we find spreads rising somewhat between Corporate bonds and long Treasury issues this month.
Commodity price inflation is a sensitive issue for bond holders, and commodity price indexes have been rising since mid-February, a negative. Gold issues have seen wide swings but are little changed. Crude oil is on a strong rally from a low near 45 in March, recently topping 65. However, we continue to believe the longer trend is toward cheaper prices for crude.
How does the consumer feel? Retail spending has been disappointing, and last week brought the news that revolving credit (not seasonally adjusted) actually fell a bit. This suggests the use of credit cards diminished.
Laborers continue to drop out of the labor force, over the past three months the civilian labor force declined by 108,000 workers, a sign that attractive jobs are not yet apparent.
China joins many foreign countries in reducing rates again, the third time in six months. Rates in Europe have fallen so much that some negative rates are featured. It is difficult to visualize America raising rates in a substantial way in the face of weak manufacturing and lower rates abroad. Our intermediate term indicators are basically neutral; but now with a slightly more optimistic tilt.
Last week we explained why the U.S. economy is not likely to have a major rebound. Bonds may be reflecting the current weakness of the dollar and rebound in oil prices. These are not likely to be sustained but we get a neutral picture with our risk indicators and that suggests a neutral approach to durations and keeping a focus on quality bonds.
F James, Ph.D.
