Perspectives from Above the Noise – Week of May 25, 2015

Global equities finished close to flat in a relatively calm week for global markets. Domestic stocks finished higher, led by small caps. International markets fell, although much of the price declines came from a significantly stronger U.S. Dollar, which reduced the returns from non-dollar denominated investments. Surprise strength in core consumer prices (that is, ex-food and energy) contributed to dollar strength, as investors believe more signs of inflation will lead the Federal Reserve (Fed) to raise interest rates this year. Domestic housing starts also reached a seven and a half-year high.

Overseas, Japan, the world’s third largest economy, grew 2.4% in the first quarter – nearly twice the pace of the previous quarter. Purchasing Manager Index data indicated slowing activity in China, yet continued strength in Europe. In the U.K., retail sales rose nearly 5% year-over-year as consumer prices fell.

For the week, the S&P 500 added +0.22%, the Dow Jones Industrial Average lost -0.19%, and the MSCI EAFE (developed international) fell -0.18%.

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

Holiday Travelers at Highest Since 2005, Despite Rising Gas Prices

In a positive signal for the U.S. economy, holiday travel will have reached its highest level in a decade over Memorial Day weekend. Gas prices have risen by a third since January, but are still a dollar per gallon lower than last year. Many Americans took advantage of lower fuel prices by traveling during Memorial Day Weekend. According to AAA, 37.2 million Americans traveled more than 50 miles over Memorial Day weekend, an increase of 4.7 percent compared to last year. As stated by Marshal L. Doney, President of AAA, “A strong employment market and low gas prices have driven consumer optimism to new highs and boosted Americans’ disposable income.”

Stanley Fischer: First Rate Hike Will Be No Big Deal

Better-than-forecast durable goods data has caused markets to start the week on a down note as investors weigh the probability that the U.S. Federal Reserve will raise interest rates sooner than expected. However, Federal Reserve Vice Chairman Stanley Fischer said it was misleading to give so much importance to the Fed’s first interest-rate hike since the process of returning to a more normal level will take a few years. “What we are thinking about is raising the interest rate from zero, which is an ultra-expansionary monetary policy. This will be a gradual process,” he said.

What Would Happen If Greece Doesn’t Pay the IMF: Q&A

With a potential Greek default only 10 days away, equity markets are trading lower given the uncertainty. A recent article explains what will happen if Greece fails to repay its Euro 1.6 billion ($1.76 billion) obligation to the International Monetary Fund (IMF) next month.

Although the IMF payment cannot be deferred, Greece may ask to bundle the June payments into a single lump payment later in the month to buy some time. If an IMF payment is missed, the immediate impact would be felt by Greek lenders who would likely lose access to Emergency Liquidity Assistance and face potential insolvency. “Failure to pay the IMF would entitle some of Greece’s other creditors, including the European bailout fund, to declare a default. They would then have the option to demand immediate repayment of all their loans, a process known as acceleration.”

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 May 18, 2015

Volatility in global asset prices over the past two weeks on the surface seems to reflect an eroding of deflationary fears and sharp rise in reflationary expectations. This shift in sentiment has been reflected in sharply-higher global bond yields, a falling dollar, and rising commodity prices. However, the data in the U.S. has continued to be noteworthy for a lack of evidence that inflationary pressures are building. Last week's data on the Producer Price Index (PPI) for April showed an unexpected decline in wholesale prices versus the prior month, falling 0.4%. Over the past year, wholesale prices have decline by 1.3%, the biggest year-over-year decline since 2010.

With the cross-currents created by rising yields and currency volatility, U.S. equities have been range-bound for most of 2015. However, the S&P 500 did manage to make a new all-time closing high last week and a decisive upside breakout in the coming days would buoy investor sentiment. Earnings season has largely wrapped up and contributed to the choppy market action of recent weeks.

For the week, the S&P 500 added +0.31%, the Dow Jones Industrial Average increased +0.45%, and the MSCI EAFE (developed international) rose +1.47%.

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

Fading Optimism on Rebound
A recent report released by the New York Fed showed a decrease in optimism among Federal Reserve and private sector economists for the U.S. economy to rebound strongly in the second half of the year. Growth is anticipated to reach 2.5 percent annualized through the remainder of the year and in 2016, below what was anticipated a year ago.

According to the report, economists are less optimistic for a strong rebound in U.S. economic growth in the near term because of lower crude oil prices causing a reduction in domestic oil exploration and a stronger dollar negatively impacting exports. The Federal Reserve might hold off on hiking interest rates until December, or possibly 2016, if the U.S. economy does not rebound strongly following weak growth in the first quarter.

Investors Cut U.S. Stocks to Sub-prime Crisis Lows

As U.S. equities indexes continue to set record highs, investors are reducing their allocation to this asset class, according to Bank of America Merrill Lynch’s May Fund Manager Survey. “Allocation to equities in the U.S. fell, with a net 19 percent of investors polled by the bank last week running underweight positions, in stark contrast to the overweight positions held in the first quarter of the year.”

Outside the U.S., investors remain bullish on equities as 47 percent of survey respondents remain overweight. Fixed income was identified as the area most likely to experience volatility this year, driven by uncertainty around potential Fed interest rate hikes and the duration of ECB quantitative easing. Finally, allocations to cash reached a 10-month high.

Bright Spot in Recent U.S. Economic Reports

One of the few bright spots in recent U.S. economic reports has been the housing sector, and the latest data suggests housing’s momentum picked up steam in April. Housing starts jumped more than 20 percent during the month, which was the best percentage increase since February 1991.

Seasonally adjusted annual units came in at 1.14 million, the highest level since November 2007, and March’s starts were revised up to 944,000 from a previously reported 926,000. Permits, which are an indicator of future starts, also jumped more than 10 percent. The latest data confirms other recent evidence that the housing sector has strong momentum heading into the summer, which is helping to offset continued weakness in manufacturing and business spending.

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.