May 2, 2016
First quarter earnings season returned the spotlight to its rightful place in April. With roughly two-thirds of companies having reported so far, we’ve seen a wide disparity in performance, both between individual companies and across economic sectors. Depending on your stock selections and sector exposures, monthly returns for equities were all over the map.
In many ways, April was a microcosm of the stock market’s year thus far. Plenty of market-moving headlines, an unwavering obsession over central bank policies, and no shortage of volatility. Yet when the dust settled, the major indices ended up pretty much where they started.
Chief Market Strategist Jim Paulsen of Wells Capital Management has referred to this environment as neither a bull market nor a bear market, but rather a “bunny market.” In other words, stocks continue hopping around but don’t move very far in a single direction. Time will tell whether this bunny is harmless or turns out to be more vicious than it appears. And if you’ve never encountered a vicious bunny, you might consider treating yourself to a viewing of Monty Python and the Holy Grail.
Six of the 10 sectors in the S&P 500 were positive last month while four finished lower than where they began. Energy (8.70%) netted the best returns thanks to a sharp recovery in oil prices. Technology (-5.39%) performed the worst despite some impressive earnings reports late last week.
|Index||April 2016||YTD 2016|
The tech-heavy NASDAQ significantly trailed the Dow and S&P 500 last month, continuing a year-to-date trend. The NASDAQ was dragged down by its largest component, Apple, which reported disappointing earnings and fell 14% in April (Note: We do not own Apple in any Marks Group strategies). Four months into 2016, Technology has been the worst-performing sector in the S&P. On the heels of a year (2015) when FANG (Facebook, Amazon, Netflix, Google) stocks were among the most celebrated market darlings, Tech’s struggles represent a reversion to the mean.
Financials, on the other hand, recovered nicely in April following a rocky first quarter. Several banks including JP Morgan reported solid earnings that contributed to strong momentum and helped the Dow top 18,000 for the first time since July 2015. Bank stocks are widely expected to benefit from higher interest rates once that trend accelerates. In the meantime, better performance was driven by earnings that exceeded low expectations, as well as the rally in Energy companies, whose large outstanding loans and falling revenue had been considered a threat to the balance sheets of many banks.
Crude oil increased by 20% in April and finished the month above $46 per barrel. From their lows on February 11, oil prices have gained 77% in less than three months. Given how far they had fallen in the previous two years, it’s not a shock that oil would stage a rally eventually. It’s more curious, however, that crude prices continue to drift higher even after a mid-April meeting between the world’s major oil-producing nations in Doha, Qatar, resulted in no agreement to cap oil production. Equity prices have moved in lockstep with oil for much of the last six months, but that was not the case in April. This de-coupling is a good thing for equities in our view, even though stock prices would have benefited more from a higher correlation to oil last month.
The Fed made no policy changes in April, electing not to raise interest rates from current levels. Most analysts expect the Fed will raise rates in June barring a significant market correction between now and then. The central bank responsible for the biggest headlines in April was the Bank of Japan, who disappointed investors by announcing no additional stimulus measures. Japanese equities fell 3.6% immediately following the news (the equivalent of 640 points for the Dow). Further rate cuts and more asset purchasing had been expected to help support the world’s third-largest economy.
The latest economic data was mixed. Stocks sold off in the final few days of April following news that the US economy grew at an annualized rate of only 0.5% in the first quarter. That represents the lowest quarterly mark in two years and is significantly below the 1.4% annualized rate we saw in the fourth quarter of 2015. Business investment fell nearly 6% in the last three months, its sharpest decline since 2009, although that number is exacerbated by massive cutbacks in the oil & gas sector.
There are still silver linings to be found. Jobless claims decreased more than expected to their lowest level since 1973, indicating the U.S. labor market remains a pillar of support. The number of people continuing to receive jobless benefits fell to its lowest mark since November 2000.
The trend of a weakening US Dollar also continued in April, which will make European vacations more expensive for American tourists but helps the net profits of US corporations that generate large revenues overseas. The US Dollar Index (which measures the dollar versus a basket of global currencies) fell 1.6% in April and is down 5.7% year-to-date.