Investment Commentary – April 8, 2015

Dow – 17,875.42 (4/7/15 close) (+0.29% YTD)
S&P 500 – 2,076.33 (4/7/15 close) (+0.83% YTD)
10-year Treasury – 1.89% (4/7/15 close) (-12.9% YTD)

  • The March jobs report last Friday was a disappointment. The number of jobs grew by a mere 126k, versus economists’ consensus expectation of almost twice that amount. A slowing U.S. economy and strong dollar contributed to weak jobs growth in March.
  • Analysts don’t believe the March job numbers will have a meaningful impact on the potential rise of short term interested rates. Fed Chair Yellen said recently that the Fed is likely to look past any weakness in the 1st quarter growth or inflation outlook.
  • Wall Street analysts expect profits for S&P 500 companies to contract 2.8%, which would mark the 1st year-over-year earnings drop since the 3rd quarter of 2009. The 1st quarter earnings season starts after the market close today.
  •  Earnings have taken a hit from unusually strong dollar appreciation, continued weakness in oil prices, and weaker-than-expected performance in the U.S. economy. The big hit to earnings will occur mainly in the energy sector, where profits are forecast to be down 63.6%.
  • U.S. large caps with a large international footprint have suffered at the hand of a stronger U.S. dollar, while more domestically-orientated U.S. small caps have outperformed large caps.
  • Europe’s economy remains susceptible to external or internal shocks, but an acceleration of economic growth would lead to an improved environment for European equities. Low inflation has led the European Central Bank to provide further stimulus, which should be a tailwind for both equity and fixed income markets.
  • Share buybacks, which have been more prevalent in the U.S., could become a growing trend in other regions too. In Europe, for instance, the ratio of free cash flow to dividends plus buybacks is double the U.S. level, while the European Central Bank’s stimulus program could eventually encourage debt-funded buybacks as has occurred in the U.S. In Japan, increasing corporate governance and companies targeting higher returns on equity could lead to companies distributing their record cash holdings to shareholders.
  • Analysts like European stocks and U.S. growth stocks.
  • In fixed income, analysts like high quality corporate bonds.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Disclosure:
http://www.pimco.com/EN/Insights/Pages/Equity-Cyclical-Outlook-Between-Fed-lift-off-and-living-in-the-New-Neutral.aspx
https://www.jpmorganfunds.com/cm/Satellite?pagename=jpmfVanityWrapper&UserFriendlyURL=contentdet_module&smID=1327728540841
https://www.oppenheimerfunds.com/advisors/article/it-aint-just-the-weather?lnksrc=ILSK1