Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Global Economy:
Recent economic data displayed underlying strength in consumer spending. US households increased spending against a backdrop of solid income growth, cheap gasoline and rising home values. A Commerce Department report showed consumer purchases climbed in January by 0.5%, the most in eight months, led by a rise in spending on durable goods such as automobiles. Wages and salaries advanced 0.6% in January following a 0.2% increase in December. Additionally, the government’s second estimate of US Q415 GDP was revised higher. The estimate was increased to a 1% annualized pace, compared with an initial estimate of 0.7% reflecting a higher value of business inventories. The ongoing decline in energy prices continued to depress US inflation, which advanced only 1.4% in January from a year earlier. Core prices, which exclude energy and food, climbed 2.2% in the past 12 months, the most since June 2012.
After facing the headwinds of a strengthening US dollar and weakness in the energy industry, US manufacturing may have reached a turning point in February as a rise in production boosted factory activity. The Institute for Supply Management’s (ISM) factory index increased to 49.5 from a 48.2 reading in January. Separately, orders for durable goods, which are items meant to last at least three years, rose 4.7%. The increase was broad based ranging from automobiles to computers, indicating widespread domestic demand. Additionally, the US added 242,000 jobs in February, while the unemployment rate stayed steady at 4.9%.
Another bright spot, low borrowing costs and steady job gains are further strengthening the US residential real estate market. The National Association of Realtors reported sales of existing owned homes increased 11% in January from the same month last year. Continuing demand and lean inventories kept pressure on prices, as the median price of an existing home rose 8.2% from January 2015 to $213,800.
Strong domestic demand outweighed slumping business investment, helping drive the UK economy to a 12th straight quarter of growth in Q415. Also, the euro-area inflation rate increased an annual 0.3% in January, well below the European Central Bank’s (ECB) medium-term inflation goal of just under 2.0%.
Global Markets:
US stocks started February sharply lower as investors weighed the impact of a slowdown in China’s economy and a rout in global oil prices. However, equities staged a mid-month rally amid better than forecasted US economic data, ultimately closing February slightly lower. For the month, the S&P 500 fell 0.10% to 1,932.23, as material and industrial related shares were the top performers. Financial companies lagged during the month as investors’ feared the precipitous decline in interest rates could hurt profitability. Mid cap equities outperformed large caps, as the Russell Midcap index rose 1.1%.
European equities retreated after lower than forecasted inflation raised concerns over the effectiveness of the ECB’s measures to fight the deflationary forces of falling oil prices. The MSCI Europe index declined 1.7% (USD), the fourth consecutive monthly decline, led by European banks that revealed an increased level of bad loans. Japanese stocks slumped as volatility surged. In a single week, the MSCI Japan index posted a near 10% decline, and then gained 9% the following week after data showed the economy contracted in Q415 raising prospects of more stimulus from the Bank of Japan (BOJ). The MSCI Japan index lost 2.7% (USD) in February.
Emerging market stocks outperformed their developed market counterparts as the MSCI EM index declined 0.2% buoyed by additional Chinese government measures to support growth. Indian stocks underperformed as the MSCI India index fell 7.1% (USD) despite government reports showing the economy grew 7.3% (year – over – year) in Q4 2015.
Oil prices started February lower, hitting a close to 13-year low of $26 per barrel on February 11 before rebounding to $33.75 per barrel. Gold prices rose 10.6% as investors rotated toward safe haven assets.
US government bond prices posted gains in February, sending yields lower after the global decline in risk assets raised the appeal of higher quality investments. Benchmark Treasury yields declined as the continued slow pace of US economic growth tempered expectations the Federal Reserve (Fed) would raise interest rates this year. In December, Fed officials predicted they would raise interest rates four times in 2016. However, interest rate futures markets indicate a 70% probability of only a single increase by the Fed’s December meeting. US Treasury 10-year yields fell 19 basis points (bps) in February to 1.74%, and now have declined 53 bps since the start of 2016. The BofA Merrill Lynch US Treasury index rose 1.0%, after a gain of 2.2% in January.
US corporate bond yields moved modestly lower in February as average yields on the Barclays Capital Corporate Investment Grade index fell 7 bps to 3.55%. After US speculative grade bond yields spiked to near 10% in January, yield seeking bond investors were attracted to the higher valuations, driving average yields on the Barclays Capital US Corporate High Yield 15 bps lower to 9.02% in February. The index rose 0.6% for the month, the first monthly gain since October 2015. Average yields on the Barclays Capital High Yield Energy sector closed at 17.09%, up from 15.75% at the start of the year.
European government bonds rallied after reduced inflationary pressures fueled speculation of further ECB easing measures to boost growth and inflation. Markets drove yields on German debt with maturities through seven years below zero. German 10-year yields fell by 22 bps to 0.11%, while peripheral 10-year yields rose slightly with Spanish 10-year yields up 2 bps from January. The People’s Bank of China cut the amount of cash the nation’s banks must reserve in an effort to inject cash into the financial system and shore up economic growth. The JPMorgan EMBI Global bond index of US dollar emerging market debt gained 2.0% in February, following a 0.2% decline in January.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.