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2015: Off to a Bumpy Start

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Stocks lost ground again for the week and bonds rallied. The 30 year Treasury yield hit 2.37% on Thursday (a record low) while the 10 year bond yield was down to 1.83% at the close Friday, not far away from its 1.39% record low. The S&P 500 lost 25 points to settle at 2,019, a loss of 1.2% for the week. The star performers last week were the European stock markets. The Euro Stoxx Index was up over 5% in euros, but less than 3% in dollars.

If you thought the stock market has been more volatile lately you’d be right. The S&P 500 has fluctuated about 1% daily so far in 2015. Bloomberg reports that that is “almost double the average daily price change of 0.53% in 2014, the calmest year in U.S. stocks since 2006.”

The big story is still mainly all about falling oil prices, although drops in copper this week had markets nervous. Is the drop in oil due to a supply glut (that’s good) or rather global demand weakness (that’s bad)? We think it’s mainly a supply story and falling oil prices are good on balance.

After falling 18% last year, copper is off nearly 10% over the first two weeks of 2015. Many view copper as one of the best indictors of global economic activity. Ed Yardeni says the plunge is raising fears that the drop in oil is attributable not just to too much supply but also to not enough demand. Stay tuned.

Bloomberg notes corporate earnings estimates for Q4 have dropped to just 2.0% YoY versus a forecast of 8.1% in October. Only a few companies have released earnings so far and they have generally been downbeat. JP Morgan, Citi and Bank of America all reported lower Q4 profits and sluggish revenue growth.

December’s headline U.S. retail sales were much weaker than expected as they fell -0.9% and the prior months were revised lower. This was a surprise but these numbers bounce around from month to month. Employment growth and consumer confidence (the confidence numbers out Friday were at an 11 year high!) have been strong of late. Q4 GDP growth is still expected to be a healthy 3%.

WSJ reports the Federal Reserve’s Beige Book saw continued moderate growth in most of its 12 districts, but some slowing in oil-producing areas. The survey sees more hiring, but little pressure pushing wages or prices higher.

Capital Economics on inflation in the US: “The 0.4% m/m drop in consumer prices in December was in line with expectations and pushed the annual rate of headline inflation down to +0.8% from +1.3% in November. This was almost entirely due to a 9.4% m/m plunge in gasoline prices.”

They go on to opine: “Even though headline inflation will spend most of this year in negative territory, if we’re right in thinking that core inflation is unlikely to fall much further, the Fed will still raise interest rates this year, probably by June at the latest.”

Good news, bad news? The World Bank downgraded its forecast for world economic growth. It now projects a world economic expansion of 3% in 2015, up from 2.6% this year, but down from its previous forecast for growth of 3.4%. It says global economic growth will rise to 3.3% in 2017. The Indian economy will expand 7% in 2015, becoming the world’s fastest-growing economy. China will be close behind, with 6.9%, the bank said.

Si se puedo! Mexico issued $2bn in 10-year (3.6%) and 30-year (4.6%) dollar bonds. These were the lowest coupons ever sold in the history of Mexico.

The European Court of Justice has ruled that the European Central Bank would be within its rights to implement a bond-buying scheme. This paves the way for the implementation of a full-blown QE bond buying program at the ECB’s next policy meeting on January 22nd.

Hot shots from around the world will be heading to Davos, Switzerland next Wednesday for their annual meeting. The agenda will focus more on emerging markets than on the U.S., but experts say the tone this year will be less upbeat about prospects in the developing world. BTW, it just got more expensive to attend the conference given the Swiss National Banks shocker on Thursday to stop repressing the Swiss franc’s value against the euro and let it find its market equilibrium. The franc soared 40% in minutes (no kidding) and settled with a gain of about 20% against the euro as it rallied from 1.2 francs to the euro to 1.0 francs to the euro. Ten year Swiss government bonds now yield -0.07%.

Next Tuesday President Obama will deliver the annual State of the Union address. Apparently he is going to ask for a 7% increase in discretionary spending (busting the sequestration caps) and offer up ideas for free community college tuition, and lower mortgage insurance premiums and only 3% down payments for first time home buyers. Haven’t we been down that road before? It didn’t end well.

The WSJ reported that less than 15% of actively managed large cap mutual funds beat the S&P 500 last year. Hey, if you can’t beat’em, join’em. Low cost index funds are a winning strategy.

Monday is Martin Luther King Day. APCM and the markets will be closed.

 

Jeff Pantages, CFA®
Chief Investment Officer

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