Perspectives from Above the Noise – Week of January 26, 2015

The major macro economic event of the past week came on Thursday morning, when the European Central Bank (ECB) unveiled its much anticipated quantitative easing program. Starting in March, the ECB will buy roughly €60 billion a month in a mix of government and other bonds on the secondary market until at least September of 2016. The bond-buying may actually last longer if the ECB is unable to boost inflation expectations, which is a key goal of this initiative. The program includes buying European agencies and sovereign bonds, and it complements the current programs the ECB already has in place.

European stocks continued their advance on Friday while U.S. stocks turned moderately lower as earnings and economic data came back into focus.

For the week, the S&P 500 added +1.6%, the Dow Jones Industrial Average gained +0.92%, and the MSCI EAFE (developed international) moved +2.64%.

Here are the 3 stories this week that rose above the noise:

Goldman Sachs Says Stay Invested in U.S. Stocks

Despite the six-year run in U.S. equities and current valuations sitting at the high end of historic norms, Goldman Sachs private bank continues to recommend that U.S. clients invest 80 percent of their assets in U.S. investments. Sharmin Mossavar-Rahmani, chief investment officer for Goldman Sachs private bank, expects the Fed will begin raising rates by mid-2015, however this alone will not signal the end of the bull market, as the S&P 500 has historically peaked 18 months after the Fed starts raising rates.

Interestingly, Mossavar-Rahmani believes that Japanese and European equities are attractive tactical plays given their cheap valuations and the potential benefits from Bank of Japan and European Central Bank monetary stimulus. While this weekend’s Greek election raises a red flag, Mossavar-Rahmani doesn’t believe that Europe’s rising populist parties will lead governments for an extended period.

Greece Chooses Anti-Austerity Party in Major Shift

An article from The New York Times provides a good summary of the Greek election results on Sunday that saw the anti-austerity Syriza party win a decisive victory. Despite a potential showdown over the terms of Greece’s bailout package, market reaction to the election results has been muted with last week’s European Central Bank announcement of a large quantitative-easing program soothing investors’ concerns over risks of a renewed financial crisis.

There are two reasons the Syriza party victory in Greece is important for investors. First, its leader Alexis Tsipras has a clear mandate to negotiate an easing of austerity imposed by Brussels and the International Monetary Fund and to write off at least some of the country’s massive public sector debts. Second, the victory is significant since younger, anti-austerity parties are on the march all over Europe, with anti-austerity movements in Spain, Italy and Portugal also gaining traction.

If Syriza were to win its negotiations with the rest of the Eurozone, these other anti-austerity parties would look more credible to voters. So why aren’t investors in a state of frenzied panic? The most likely reason is that many believe reason will prevail and Berlin will sanction a write-off of Greece’s excessive debt. Here’s an important point: outside of Germany, it is almost impossible to find an economist or central banker who believed the previous reconstruction of Greece was ever going to work. Uncertainty over the future direction of the Eurozone is likely to remain a source of volatility for global asset markets in 2015 and beyond.

Yes, a Northeast Blizzard Can Slow U.S. Economic Growth

Severe winter weather can negatively impact economic growth, especially when snowstorms hit a heavily populated area with a lot of economic activity. New England is dealing with a blizzard this week and if economic activity is slowed for even a short period of time, the impact may be seen in first-quarter GDP data. Last year, unusually harsh winter conditions resulted in a 1.4 percent reduction from first quarter GDP growth, according to economists at Macroeconomic Advisors.

Payroll growth also slowed in the first quarter of 2014. Harsh winter conditions negatively impact the economy in the near term, but often result in an economic rebound when the weather improves, as seen last year. The U.S. economy grew by 4.6 percent annualized in the second quarter, following a sharp contraction in the first quarter, displaying that economic activity was delayed and not eliminated because of severe weather.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of January 19, 2015

Fears that the global economic recovery is stalling came to a head in the past week. The World Bank significantly reduced its 2015 and 2016 global growth forecasts and economically sensitive copper plunged to the lowest level in more than five years during the week. Disappointing retail sales also heightened concerns over whether the U.S. can remain immune to the global economic malaise.

Markets were already on edge when the Swiss National Bank stunned investors on Wednesday night by scrapping its long-standing pledge to limit the value of the Swiss franc to €1.20. The move set off wildly volatile trading in foreign currency markets, including a nearly 20% plunge in the euro relative to the franc. Rumors of large losses among hedge funds and currency brokers, along with associated margin calls, created extreme market volatility in the hours following the announcement, all of which seemed to stabilize by the week’s end. Strategists speculated that the Swiss moved because they had been tipped off that the European Central Bank (ECB) will announce a large-scale quantitative easing program at their January 22 policy meeting.

For the week, the S&P 500 dropped -1.24%, the Dow Jones Industrial Average fell -1.27%, and the MSCI EAFE (developed international) gained +1.5%.

Here are the 3 stories this week that rose above the noise:

ECB May Deliver $635 billion Bond-Purchase Program

This week The European Central Bank (ECB) is likely to announce a €550 billion bond-purchase program this week and won’t skimp too much on the details, economists say. ECB President Mario Draghi will make his biggest push yet to steer the euro area away from deflation by announcing quantitative easing on Jan 22. The median estimate of the size of the package tops €500 billion and anything less may prove disappointing to markets given current high expectations.

Energy Holders at Risk as Bank Loans Ebb

A Financial Times article details the impact that plunging oil prices may have on the ability of oil and gas companies to borrow from banks. As explained in the article, the bank borrowing of oil and gas companies is normally refinanced in April and a tightening in bank lending would increase the reliance of energy firms on the high-yield bond market.

As a result, energy bonds and high-yield credit in general may remain under pressure into the spring barring a sharp rally in oil prices.

Why a Big Swing in Jet Fuel Costs Brings Small Change to Airfares

Jet fuel prices have dropped significantly in the last 12 months, but the cost of airline tickets has only dropped marginally. Over the last year, airline prices have dropped by only 4.7%, compared to a 23.5% decline in the price of jet fuel. There are a handful of reasons why airline tickets have only dropped by a small margin compared to jet fuel prices.

According to the trade group Airlines for America, fuel costs only account for 26% of the ticket price. The additional costs for airlines, including taxes and labor costs, have been flat or rising. Additionally, airlines don’t always pass cost savings from a drop in jet fuel prices to the consumer. Instead, they allow for an increase in profits. On the other hand, when fuel prices rise, it negatively impacts profits for airlines because airlines are unable to pass all of the cost increase to the consumer. For example, when fuel prices rose by 75% between March 2009 and March 2010, airline tickets only increased by 7.5% over that time span.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer. 

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of January 12, 2015

Investment markets have started the year with a spate of volatility. Hopes for a large-scale quantitative easing program from the European Central Bank (ECB) received a boost last week from more disappointing data, including falling German factory orders. Other concerning data included Wednesday’s “flash” estimate of Eurozone inflation readings for December which showed prices declining on a year-over-year basis, the first negative such reading since 2009. That’s added to widespread fears that the region is now at risk of Japanese-style deflation.

Domestically, economic data last week was highlighted by the nonfarm payrolls report for December, which was released on Friday. The headline number was again solid, indicating 252,000 jobs were created vs. economists’ expectations for 240,000. December was the eleventh straight month of gaining at least 200,000 jobs, the longest stretch since January 1995. The already impressive job gains of the prior two months were revised upward by an additional 50,000 jobs, helping the headline unemployment rate fall from 5.8% to 5.6% — the lowest headline unemployment rate since June 2008.

For the week, the S&P 500 dropped -0.65%, the Dow Jones Industrial Average fell -0.54%, and the MSCI EAFE (developed international) lost -1.86%.

Here are the 3 stories this week that rose above the noise:

The Stock Market Is Overvalued Any Way You Look At It

In a recent article, Mark Hulbert summarizes the current valuation of U.S. stocks relative to past market peaks. Using six different indicators with long historical records and very different methodologies, Hulbert concludes that the U.S. market is already valued more richly than it was at the peaks of the majority of past bull markets.

One mitigating factor that has tempered our concern over valuations has been the macro backdrop of extremely low interest rates and subdued inflation. However, when looking out several years we agree with the general message that U.S. equity returns are likely to be modest given valuations that are already very high by historical standards.

Oil’s New Normal is Lower for Longer: Goldman

Goldman Sachs recently cut its oil price forecast and they project that oil will remain lower for longer due to a shift in supply and demand fundamentals. They forecast that West Texas Intermediate (WTI) crude will trade at $41, $39, and $65 a barrel over the next three, six and 12 months, respectively.

WTI crude oil is currently trading at $45 a barrel. In their view, oil will rise in the second half of the year, but will recover to a level that is far below the high reached last summer.

The Race to Negative Yields: Historic Action in the Bond Market

As yields on U.S. treasuries continue their descent from last year, should this trend be viewed with optimism or skepticism? Pension Partners illustrates how declining interest rates extend well beyond the U.S. and questions the current narrative that expansionary monetary policy will continue to support rising stock prices.

A number of developed nations across Europe and Asia have seen their 10-year yields drop to all-time lows in 2015. Germany, Japan, and Switzerland highlight this list, each of which has seen their yields drop below 0.50 percent. While central bank easing has previously lifted global stock prices, this hasn’t been the case in 2015, as lower yields have been accompanied by lower stock prices. Could this be signaling eroding confidence in the efficacy of easy monetary policy?

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

RETRO-Spectives from Above the Noise – 2014

The 3 Major Stories in the Global Economy for the Year

I would like to wish all of our readers a happy and prosperous 2015! As we did last year, I wanted to take a moment to reflect on the previous year, and take a look at the events that shaped the economy last year, and potential impact on 2015. The bull continued to run in the US, but other economies and investment asset classes lagged behind.

Volatility continues to be the norm. For the year, the S&P rose +11.5%, the Dow gained +7.5%, and the MSCI EAFE (developed international) lost -8.1%.

Here are the 3 major stories from 2013 we believe will continue to impact 2014:

Oil Prices Fall Hard…Where to Next?

With crude oil briefly trading below $50 a barrel on Monday, many wonder if the commodity is oversold and due for a rebound. However, one prominent analyst, Citigroup’s Ed Morse, believes there is further downside. Last March, Morse correctly predicted $75 a barrel global oil prices, back when it was trading above $100. His team at Citigroup are now calling for global and U.S oil prices to average $63 and $55 a barrel this year, respectively. They believe that the 2014 price decline was supply driven, and that the oversupply condition will continue to drive prices even lower before recovering somewhat in the second half of 2015 and into next year.

For more thoughts on the price of oil, please see our last blog entry—a special perspective on oil.

The Relationship Between Stocks & Interest Rates

We know the general inverse relationship between bond values and interest rates, but predicting equity trajectory during periods when interest rates rise is a little bit tougher. An article from the Wall Street Journal provides the history of S&P 500 returns when the U.S. Federal Reserve boosts rates. The author reviewed 14 periods during which the Fed was boosting short-term interest rates since the S&P 500 index was launched in 1957. He calculated the returns for the index in each period from the month when rates bottomed out through the month when rates peaked. The periods ranged in length from several months to more than four years. The average return for the S&P 500 during all four periods was 9.6%, including dividends. The S&P 500 fell in only two of the 14 periods, both in the early 1970s. Other researchers have pointed out similar conclusions although they point out that the stock market has tended to undergo increased volatility (an average decline of 8%) around the initial instance of rate hikes.

It might not matter. According to bond guru Bill Gross, it will be difficult for the Fed to raise rates in light of continued sluggish global growth and low inflation. He has a weak outlook for growth this year in both developed and emerging markets. Moreover, he feels the strengthening U.S. dollar and falling oil prices will also contribute to the Fed holding off on raising interest rates. The Federal Reserve has not raised short-term interest rates in nine years, but the consensus expectation is for a rate hike in mid-year.

Divided Government--Officially

The US government officially became divided, with Republicans seizing control of both houses of Congress. Expect a whole lot of nothing as President Obama does not have the votes from his party in either house, and the Republicans lack a super-majority to override any veto. There will likely be many “symbolic” legislation sent by Congress to the President’s desk, but the larger issues will likely be ignored.

Tax Reform is probably the single largest economic issue that needs to be addressed (but likely won’t). Not only does it affect the net income of every American by its arcane complexity, it also affects the long-term viability of social security, calculation of Medicare premium payments for retirees, business planning (e.g. hiring for growth), and much more. Again I do not expect any of this to be addressed by a fully divided executive and legislative branch.


Looking ahead, we're optimistic about 2015. We do expect US equities to slow their pace of growth. Corrections & bear markets are part of the normal investing and economic cycle, and statistically we are due for either. That said, there are still many prospects for growth and opportunities in other asset classes. Long term economic trends are still heading in the right direction. Although it's impossible to predict market trajectories with accuracy, we're always on the lookout for both dangers and opportunities for our clients, and we look forward to supporting you in the year ahead!

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.