04/29/15   GDP Sputters

Editor’s Corner

Ron Rowland

This morning the Commerce Department announced the country’s gross domestic product increased at an annual rate of just 0.2% in the first quarter of 2015.  The slowdown comes after a 2.2% growth rate in the fourth quarter and 5% in the third.  First quarter of 2014 had the same pattern, a poor start to the year after a couple of quarters of good growth.

In 2014, harsh weather took the bulk of the blame for the poor Q1 performance, while this year that factor is joined by a rising US Dollar and low oil prices.  The rising currency helped the trade deficit to surge, with exports decreasing 7.2% and imports rising 1.8%.  Weakness in petroleum exploration contributed to a 23.1% decline in nonresidential structures and a 48.7% decline in spending on wells and mines.

The largest factor of the economy—consumer spending—did its job and rose 1.9%.  A bright star in this category was automotive sales.  With low fuel prices and job prospects getting better, consumers are opening up their wallets for new cars.  Many economists expect consumers to spend more as milder weather and faster wage growth materialize.

The Federal Open Market Committee concluded its two-day meeting today.  The market has been expecting that the Federal Reserve would maintain short-term interest rates at the current level, and that is exactly what happened.  Today’s dismal GDP report likely added to the decision to keep rates steady for the time being.  Early in the year, speculation was that the Fed would look to raise rates in June.  As batches of soft data have been released, discussions have turned toward a possible rate hike at the end of the year.

Investor Heat Map: 4/29/15

Sectors

Telecom climbed three spots to become the new top-ranked sector.  Technology is close on Telecom’s heels, also improving three positions.  Energy eased off one spot, taking a rest after its recent strong ascent from last place.  Consumer Discretionary was pushed down one spot, and Health Care tumbled from first to fifth.  Both have been providing much of the upside leadership so far this year, but selling pressure in Biotechnology stocks pulled down an otherwise strong Health Care sector.  Materials moved two spots higher, and Financials improved by one.  Consumer Staples lost three spots, joining Health Care in displaying some short-term weakness.  The third member of the defensive trio, Utilities, improved its status instead of posting declines like Health Care and Consumer Staples.  Although it did not climb in the rankings, Utilities di d manage to get rid of its red pixels.  Real Estate is currently the only sector with a negative momentum reading.

Styles

The market has been favoring small company stocks with growth characteristics for months.  Today there is a shift toward growth being the more dominant of those two factors.  All three Growth categories are in the top-five today, and the three Value categories are at the very bottom.  Small-Cap Growth continues to lead the pack, and Micro-Cap is close behind.  Large-Cap Growth jumped from sixth to third, while Mid-Cap Growth actually slid a spot to fifth.  Mega-Cap, Large-Cap Blend, and Mid-Cap Blend all improved their standing.  Small-Cap Value and Mid-Cap Value both slid lower.  Large-Cap Value moved up one level off of the bottom, but it is still tagged as part of the lagging Value group.

Global

The US Dollar lost ground against most major currencies this past week, which was a blow to all of the new currency-hedged funds.  It was also a blow to US stocks, which are now at the bottom of the stack in our global rankings.  China retains the top position, with a sizeable margin over the rest of the field.  Emerging Markets moved ahead of Japan, although both gained strength.  Pacific ex-Japan often has high correlation to the Materials sector, and this week that trait helped it move three places higher.  Latin America surged from last place to fifth, its highest ranking in about seven months.  EAFE and Canada both gained momentum but still slipped in the rankings.  World Equity was pulled lower by the two categories below it.  Europe is now second to last, but the US sits on the bottom.  The US was near the top just two months ago and hasn’t been in last place since January 2013.  Investors that gave up on international investing may need to reevaluate their position.


Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“There is plenty of evidence to suggest that the first quarter slowdown
represents a temporary blip,and that growth will rebound in the second quarter.”

Chris Williamson, chief economist of Markit.


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