Stocks had a bit of a rocky start to the week as the market’s capricious nature was on display during this holiday shortened trading week. Equities sold off by more than 1% on Tuesday as good economic data spurred concerns over the ever impending rate hike from the Federal Reserve. Wednesday saw a rebound of nearly all the preceding day’s drop and in some cases more, as the NASDAQ Composite rallied 1.5% to close at a new all-time high. When all was said and done on Friday though the S&P 500 had lost 0.8% for the week. However, for the month of May the index was up 1.3% and has gained 3.2% in 2015.
U.S. Treasuries maturing in three years or more saw modest gains in price this week as yields dropped between seven and ten basis points depending on the issue. The ten year Treasury closed the week at 2.12% while the 30 year currently yields 2.88%.
A revised estimate for first quarter U.S. GDP was released on Friday which showed growth turned negative from January to March. The economy contracted 0.7% over the period, down from the prior released gain of 0.2%. This is the third negative quarter for the current expansion that began in March 2009. While the decline technically makes the U.S. just one quarter away from a recession, it is a bit too soon to panic. Much of the drop from +0.2% to -0.7% is attributable to lower exports caused by the strong rally in the dollar (which has abated for the time being). Also, many economists continue to point to the easy scapegoat and blame the weather for the decline in economic activity. It is worth remembering too that markets (i.e. stock prices) and fundamentals (i.e. GDP growth) don’t always move in lockstep. Bottom line from the negative GDP print is that while the planet may be warming, the sky is not falling. At least yet.
If you are a business and have a disappointing negative trend in company sales what do you do? Well, if you are McDonald’s then you simply stop reporting the data. The world’s largest restaurant chain announced this week that it would no longer be publishing monthly figures for same-store sales. The company has been facing a significant downward trend in the metric for roughly the past three years. In an effort to turn things around though, the buns on your Big Mac will now be toasted for five whole additional seconds to make them warmer and crispier.
Bill Gross, who advised of “the short of a lifetime” last month, conceded this week that his recommendation was “well-timed but not necessarily well-executed.” Recall German 10 year yields fell to an all-time low of just seven basis (0.07%) points on April 20th and then preceded to jump roughly 10 fold to 0.72% by May 13th. As yields move inverse to price, a short trade over that period should have been wildly profitable. However, despite the violent move the Janus Global Unconstrained Bond Fund (which is managed by Gross) lost 2.5% in that time frame. It turns out that the PIMCO founder and former CIO structured the trade in anticipation of yields staying in a narrow range which negated much of the gains.
And therein lies one of the biggest problems with active management; there is a lot to get right and unfortunately the odds are against you. It is not just simply a matter of identifying cheap (or in this case overvalued) assets, but both the timing and the execution need to align. This may happen from time to time, but it takes more than the occasional win for active management to work. That is why at APCM we focus on getting broad market exposure and staying fully invested over the long term. As an added bonus passive strategies are also cheaper and remember, fees do matter. While Gross’ German short did not work out the way he wanted, the 1% annual expense ratio on his fund will probably help make him feel better.
Tomorrow marks the best day of the annual solar alignment in New York City referred to as Manhattanhenge. This is when the sun sets in such a way that it aligns with the city’s street grid. It is depicted in the attached image, or Google to see more examples. And finally, speaking of the sun I just have to note that it is ridiculously pleasant outside here in Anchorage right now. We’ve got sun on tap for the weekend and a forecast of 73 degrees on Sunday. The record is 75 from 1964 so this one could go down!
Senior Investment Analyst