After a weak performance by most market indices during the month of March, major global markets eked out a slightly positive performance in April. On both sides of the North American border, the markets were up by about 1% during the month. However, uncertainty prevailed for most of the month, continuing into May, amid a continuation of sub-par U.S. economic data and a mixed bag of corporate earnings reports. Despite this uncertainty, the 10-year U.S. Treasury yields, a commonly used benchmark for risk-free bond returns, increased to 2.13%, up more than 0.30% from the low set about a month ago.
In the global markets, China continued its strong performance in the expectation that the government will maintain an accommodative economic policy in an attempt to revive growth, which has been losing steam in recent months. Germany and France, both had strong first quarters, and gave back some of the positive returns, although Greece made its €200 million payment to the International Monetary Fund (IMF) on time, abating some of the fears relating to the impact of a default on the Euro Zone.
What were the major themes?
The economic growth in the U.S. slowed sharply in the first quarter, mainly due to the harsh winter, the west coast ports disruption, and a contraction in the oil and gas sector given the weaker energy prices. GDP expanded only 0.2% in the first quarter, in sharp contrast to the 2.2% and the 5.0% growth realized in the last two quarters of 2014. The west coast port slowdown alone took away 1.3 percentage points from growth.
In Canada, the trade deficit grew to $3 billion in March, which may mean that the economy likely shrank in Q1 2015. Over in the UK, economic growth slumped to its slowest pace in three years expanding only 0.3% in the first quarter.
Some good data points
On the consumer front, there were some good data points that came out in the U.S. Weekly initial jobless claims fell to a 15-year low as downward revisions were made to the February and March unemployment numbers. Consumer spending rose in March by 0.4% as households increased purchases of big ticket items such as automobiles.
Oil extended its recent recovery to over $60/barrel, the highest level since early December and up 35% from the mid-March lows. As a result, we saw the Canadian dollar strengthening during the second half of April.
The U.S. corporate earnings for Q1 2015 have thus far pleasantly surprised investors. For the 447 S&P 500 companies that have reported Q1 results (as of May 8th), 71% reported earnings above the mean estimate and 45% reported sales above the mean estimate. Much of the positive surprise has been attributed to the negative revision in estimates made in the previous quarter due to the impact of slower global economic growth, the stronger dollar, and lower oil prices impacting the energy sector. However, the impact of the lower energy prices should filter through the economy in due course and begin to show the positive impact on corporate earnings in the coming quarters.
The current 12-month forward Price/Earnings ratio is 16.8, which is above the five-year average of 13.8 and the 10-year average of 14.1 (Source: FactSet), causing some concern that equities in general may be over-valued. However, considering how low bond yields have remained in the last several years, it may not be totally unreasonable for equity valuations to remain higher than long-term averages. Furthermore, companies generating and maintaining a lot of cash on their balance sheets is a good sign for the equity markets as we could continue to see stock buy-backs and strong dividends providing support to prices, barring any unforeseen events.
Over the next month or two, we will likely continue to see policy uncertainty from the Federal Reserve as it relates to any interest rate increases. Their recent statement reiterated that any increase in rates would depend on further improvement in the labour market and reasonable confidence that inflation will move back to the Fed’s 2% objective over the medium term, which we haven’t seen thus far. This will likely keep the uncertainty and volatile conditions in play with the debate continuing on the timing and aggressiveness of the rate increases.
However, rising bond yields we have seen lately is a sign that expectations of a stronger economy may also be on the rise. The improving employment situation coupled with a strong consumer sentiment should provide further impetus to corporate earnings, which we know ultimately drives stock prices.
As we always reiterate, long-term investors should not worry about these shorter-term uncertainties in the markets. Holding a well-diversified portfolio of global exposures aligned with your financial goals, reducing your total cost of investing and staying the course with your investment plan are the keys to long-term investment success.
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