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Stocks Hit a Bit of a Rough Patch

CaseStocks hit a bit of a rough patch this week and closed the month of April on a down note. However, the S&P 500 did manage a 1% gain for the month and found some traction on the first day of May. For the week, the index lost 0.5% as it retreated from its all-time high reached last Friday and closed at 2,108. The Dow Jones Industrial Average was down a bit less with a loss of 0.4% while the NASDAQ Composite, which surpassed its dot com peak last week, fell from grace and ended the week down 1.7%. For the year, the S&P has gained 3%, the Dow has returned 2%, and the NASDAQ is up 6%.

After going basically nowhere last week, bonds moved around a bit this week with yields ending higher by about 20 basis points for maturities of five years and up. The yield on the ten year Treasury traded above 2% for most of the week and closed Friday at 2.11%. Thirty year bonds are at 2.83%

The FOMC had a two day meeting this week and released a statement on Wednesday that reflected its continued dovish stance on monetary policy. The Committee noted that economic growth had slowed over the winter and job growth had moderated recently, but attributed much of this to “transitory factors.” The Fed “continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace.” The prior statement from March specifically mentioned that a rate hike at this meeting was unlikely and the Fed followed through in that regard as the target for the federal funds rate was reaffirmed at 0-0.25%. This statement however lacked any future calendar references and there was no press conference afterwards so market participants were on their own to read between the lines. Implied probabilities on futures contracts show no chance of a rate increase in June, a 25% chance of a hike in September and just over a 50% chance in December. At this point rate hikes are inevitable as it’s not a matter of if, but when.

That vacation in Europe you have been thinking about just got a little more expensive this week. The euro, which has been getting clobbered over the past year, found a bit of a second wind this week as it gained a little over 3% vs. the dollar and ended Friday at $1.12. Despite rallying 12% from its recent low against the dollar in March, the common currency is still down almost 20% from a year ago. The rise in the euro masked an ugly week for European equities. The STOXX 600 index dropped over 3% when priced in euros, but U.S. based investors only saw a modest decline of 0.4%.

The strength in the euro was spurred along by the release of a weak Q1 GDP growth figure in the U.S. and a lower than expected reading on PCE core inflation. U.S. GDP grew by just 0.2% in Q1 while forecasts had been calling for a gain of 1%. Additionally, core PCE, which stands for personal consumption expenditure and is the Fed’s preferred measure of inflation, came in at just 1.3% on a YoY basis. With inflation remaining low and job growth weakening that could suggest the Fed may delay raising rates, which ultimately makes the dollar look less attractive on foreign exchange markets.

Equities in Asia were mixed this week. China saw gains of about 1% while shares in Japan tumbled between three and four percent depending on the index as bad economic data and dashed hopes of more stimulus from the Bank of Japan (BoJ) weighed on markets. Despite reaffirming its current ultra-loose monetary policy, the governor of the BoJ noted that its 2% inflation target remains elusive. Over the past two decades inflation in Japan has run at an incredibly anemic rate of just 0.12% per year. For comparison, while the U.S. has been facing sluggish inflation as of late, over the past 20 years prices in America have gone up by an average of 2.2% each year. Compounding Japan’s economic problems is an unemployment rate that ticked lower to 3.4% this week, driven in part by an aging and shrinking population.

The economic data calendar is pretty light next week, with the exception of the payroll number on Friday. Economists are expecting a rebound from the low reading in March with a gain of 225k for April. The unemployment rate is expected to tick down to 5.4%. Also next week, there are speeches from four Fed presidents as well as one from Janet Yellen on the calendar. These speeches have been getting more attention recently as the Fed struggles with the decision of when to raise rates.

Well it is May 1st, the sun is out in Anchorage, we are getting highs in the mid-50s, and we have over 16 hours of daylight. I guess things could still fall apart, but at this point it is probably safe to say that the 2014-2015 winter season will be the lowest snowfall on record. Official readings form the weather service peg the snowfall since July 1, 2014 at 25.1 inches, which is still 5.3 inches below the record set in 1957-58. Here’s to hoping this one goes down in the record books!

Nicholas Case
Senior Investment Analyst

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