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.