Investment Commentary – May 6, 2015

Dow – 17,841.98 (5/6/15 close) (+0.11% YTD)
S&P 500 – 2,080.15 (5/6/15 close) (+1.02% YTD)
10 year Treasury – 2.24% (5/6/15 close) (+3.23% YTD)

  • A combination of higher interest rates and mixed company earnings kept U.S. stocks in general under pressure last week. The losses, however, were more severe for rate-sensitive market segments such as U.S. utilities, which lost more than 1.5% last week.
  • Stocks historically weather weak earnings growth well, except during times of recession. While weak earnings may moderate near-term gains, the equity price trend remains higher analysts believe.
  • The drivers of U.S. interest rates are no longer tethered to economic fundamentals like growth or inflation, but are instead held in check by the opportunity cost of paltry yields around the rest of the developed world. Simply put, investor demand for U.S. bonds will likely keep rates low as long as yields in Germany, France, UK, Japan, and Canada continue to be significantly lower.
  • The European economy is picking up, but from a very low base, and likely to grow at a very modest pace. The European Central Bank will continue to provide significant support.
  • Analysts continue to like stocks over bonds.
  • In fixed income analysts like high yield and senior bank loans
  • Analysts believe the current S&P 500 earnings growth slowdown is likely to be temporary, based on the following:

1. The biggest recent earnings headwinds—dollar strength and falling oil prices – have both reversed since late March. The U.S. dollar index is down 5% since then, while the price of oil is up more than 39%.
2. What’s more, while commodities and currencies are notoriously hard to forecast over the short term, their recent reversals appear to us to be fundamentally justified and unlikely to unravel overnight.
3. With the U.S. now the world’s biggest oil producer, a major factor in crude’s rebound centers on the roughly 50% decline in the domestic oil rig count since last fall, which is likely to curb supply in the 2nd half of 2015.
4. Meanwhile, the dollar is down, as disappointing U.S. growth tempers expectations of the Fed increasing short term rates.
5. Lastly, significant corporate profit decline has generally coincided only with the big sales declines seen in Recessions. By contrast, we’re not seeing that now. 1st quarter and full year 2015 S&P 500 revenues are seen falling only 1.4% and 0.9%, respectively, while 1st quarter net margins remain stable near 9.5%.


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.