Market Update for the Month Ending April 30, 2014
Presented by Manning Wealth Management
Markets bounce around as economy improves
Financial markets were volatile during April, even as most recovered to show little change. The Dow Jones Industrial Average was up 0.87 percent, and the S&P 500 Index gained 0.74 percent, while the Nasdaq dropped 2.01 percent. The small changes in the Dow and S&P 500 masked two intramonth declines of about 2 percent and 3 percent, respectively, which hit technology and momentum-oriented equities. This drove the Nasdaq, which has a higher population of these stocks, to a worse performance for the month and into negative territory for the year.
Early reports showed a decline in corporate earnings over the previous quarter. Although data from month-end moved earnings back into growth territory, the numbers were below what had initially been expected. Uncertainty about earnings growth, combined with bad news about the Chinese economy and the Ukraine situation, made investors nervous. Technical factors also showed weakness.
Developed international markets performed more strongly than U.S. markets, with the MSCI EAFE Index up 1.45 percent. About half of this came from currency appreciation relative to the dollar. The strong month was in part a bounce back from previous underperformance and reflected less exposure to technology and momentum stocks. The MSCI Emerging Markets Index was up less0.06 percentreflecting uncertainty about China’s economy.
Longer-duration fixed income securities performed best. High-quality, longer-dated bonds and TIPS posted the strongest returns in April because of investor demand for certainty and yield. The worst-performing area within bond markets was the floating-rate bank loan space. The Barclays Capital Aggregate Bond Index returned 0.84 percent.
Spring continues for U.S. economy
After the economic weakness of January and February, statistics for March showed the slowdown to be largely due to weather. Employment numbers for March highlighted much stronger job growth, which was confirmed by even better April employment data.
Better employment led to increased consumer confidence and higher spending, a primary driver of the economy. Retail sales were up 1.1 percent, partially reflecting pent-up demand, but still well above expectations. Personal consumption rose at a brisk pace.
The news was not all good. Economic growth was reported as 0.1 percent for the first quarter of 2014; however, because this largely reflected bad winter weather, it wasn’t a significant concern. More worrisome was an apparent slowdown in the housing recovery (see chart).
Consumption Was Strong, But Other Factors Slowed First-Quarter Growth
Source: BEA
The Federal Reserve continues to taper
The Federal Reserve (Fed) continued to reduce its bond-buying program by $10 billion, to $45 billion per month. There was speculation that the weak first quarter might have led to a pause, but the Fed concluded that the economic recovery was strong enough to continue the pace of purchase reductions.
International uncertainty remains
The situation in Ukraine continued to simmer. There is a growing conflict between the U.S. and our European allies about how to address the situation; Germany in particular is strongly lobbying against increased sanctions.
The second area of concern is China, where signs of a significant slowdown continue to appear. Chinese manufacturing and exports have shown lower-than-expected growth, and there are hints that China’s leaders realize that slower growth may be necessary to unwind some of the country’s financial imbalances.
Spring is here
It seems clear that spring is here for the U.S. economy. Steady improvements in employment and consumer spending are optimistic signs. And, although worries remain, trends appear not only favorable but improving for the real economy.
Financial markets are less certain. U.S. market results for April showed signs of potential weakness. Company earnings, though beating expectations, weren’t particularly impressive. Technical damage was also done to the major indices, and therefore markets bear watching.
Overall, our stance remains optimistic but with some concern about the financial markets, which remain vulnerable to uncertainty. As always, a diversified portfolio constructed around an investor’s own risk tolerance and time frame should help achieve goals, regardless of what happens in the interim.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.
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Michael Manning is a financial advisor located at Manning Wealth Management 2550 5th Ave, Suite 800 San Diego, CA 92103. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 619-237-9977 or at [email protected].
Authored by Brad McMillan, vice president, chief investment officer, and Sean Fullerton, investment research analyst, at Commonwealth Financial Network.
© 2014 Commonwealth Financial Network®
