Investment Commentary – May 4th, 2016
Market Indices as of Market Close May 4th, 2016
Dow 17,651 (1.30% YTD)
S&P 2,051 (0.35% YTD)
NASDAQ 4,725 (-5.63% YTD)
Global Dow 2,321 (2,033 52 week low /2,644 high)
10-year Treasury 1.77 (1.53 52 week low /2.50 high)
Gold 1,281 ($1,047 52 week low /high $1,306)
Oil $44.05 ($30.79 52 week low /high $65.93)
JP Morgan Thought of the week
1Q16 saw U.S. GDP post its slowest gain in two years, as the economy expanded at an annual rate of 0.5%. This weakness has understandably raised the specter of recession amongst investors, prompting many to ask if growth will deteriorate further. While it is true that the odds of falling into a technical recession increase as trend growth declines, such a development seems unlikely in 2016. GDP growth in 1Q16 was weak due to drags from trade and investment – two components that have fallen largely due to headwinds stemming from a high dollar and low commodity prices. A strong U.S. currency makes exports less attractive to foreign consumers, simultaneously making imports cheaper at home, lowering and raising demand respectively. Low commodity prices have caused many companies to reign in their capital spending, as evidenced by the 70% decline in energy investment from its 4Q14 peak. However, the main drivers of growth, housing, consumption and government spending, which together make up 90% of GDP, continue to improve at a steady pace. Thus, investors should recognize that the headwinds to growth are temporary in nature, and going forward, a weaker dollar and more stable commodity prices should allow U.S. economic growth to move back toward its post-crisis trend.
Strong U.S. services sector data buoys economic outlook
The U.S. services sector expanded in April as new orders and employment accelerated, bolstering views that economic growth would rebound after almost stalling in the first quarter.
The growth outlook was, however, dimmed by another report on Wednesday showing private employers hired the fewest number of workers in three years in April.
Reported on Tuesday, the economy’s firm fundamentals that could keep the Federal Reserve on track to raise interest rates twice this year: “The earliest indications point to a solid growth rebound of the U.S. economy in the second quarter. If Friday’s payrolls report corroborates that trend, a June rate hike certainly remains an option,” said Harm Bandholz, chief economist at UniCredit Research in New York.
The Institute for Supply Management said its nonmanufacturing index rose 1.2 percentage points to a reading of 55.7 in April, with the majority of industries expressing optimism about the business climate and the economy.
A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of the U.S. economy. Services industry activity was last month buoyed by a 3.2 percentage point surge in new orders.
A gauge of services sector employment rose to 53.0 last month from a reading of 50.3 in March. Construction firms reported “severe” shortages of unskilled labor.
Companies in the energy sector said recent oil price increases had slightly improved the outlook for the industry, but the gains had not been enough to initiate hiring or spending.
The rise in services sector employment last month eclipsed the slightly weak ADP National Employment Report, which showed private payrolls increased 156,000 last month, the smallest gain since April 2013, after rising 194,000 in March.
THIS DAY IN FINANCIAL HISTORY
May 4, 1932 Capone Goes To the “Big House”
Chicago Mob boss Al Capone was sentenced to eleven years in jail and made to pay $80,000 in fines. The reason for the jail time and fines wasn’t connected to his mob ties, but was because he had failed to pay his taxes.
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 investments.