Wednesday, April 8, 2015

Perspectives from Above the Noise – Week of April 6, 2015


The past week included another slew of evidence that the domestic economy continued to slow significantly in March. Wednesday’s ISM Manufacturing Index continued a recent trend of disappointing manufacturing data. At 51.5, it was the lowest reading for the index since May 2013 and it missed consensus expectations for the fourth straight month - the longest string of disappointments since August 2012. Among the headwinds cited by the survey’s respondents were references to the West Coast port shutdown, a harsh winter, and the strong U.S. dollar.

Despite generally disappointing domestic economic data in recent months, credit market metrics have yet to signal the type of stress typically seen heading into prolonged economic downturns. However, last week provided one of the first pieces of evidence that credit conditions may be deteriorating. The NACM’s Credit Manager’s Index indicated the amount of credit extended dropped by the most on record over the past two months and the rejections of credit applications also spiked to the highest level in the history of the data (dates back to 2002).

For the week, the S&P 500 added +0.53%, the Dow Jones Industrial Average ticked-up +0.48%, and the MSCI EAFE (developed international) gained +0.21%.

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

All 3 Preconditions for Active Outperformance Are Present

Over the last two years, we have often commented that diversification into global equities and alternatives has detracted from performance, as investing exclusively in U.S. equities would have been rewarded over being in a globally allocated strategy. Similarly, the recent market environment has led to relative underperformance from active mutual fund managers who have struggled to beat their benchmarks.

However, Josh Brown notes that three preconditions (cash not a drag, international and small-cap equity doing well) for active fund outperformance are now finally present. Additionally, dispersion (the degree of standard deviation between stocks from one another) has notably increased which historically bodes well for active managers who can demonstrate their asset allocation and/or stock picking skills.

Weak Jobs Keeps Fed at Bay until Second Half


The US economy added just 126,000 jobs in March, the worst monthly gain since December 2013, and about one-half the 245,000 jobs expected to be added by economists. Despite the weak jobs report released last Friday, U.S. markets shrugged off the news on Monday as stocks rallied. The markets focused on the likelihood that the U.S. Federal Reserve will move more slowly than previously expected to raise interest rates with September being the earliest timeframe for the Fed to act in the minds of many traders.

Additionally, the weaker-than-expected March report is also only one disappointing month in a stretch of solid employment reports and it remains unclear how much severe winter weather, port strikes and slumping energy prices may have temporarily disrupted the strong recent trend of U.S labor markets.

The U.S. Oil Boom Is Moving to a Level Not Seen in 45 Years

U.S. oil production is on track to reach an all-time high later this year, despite a sharp contraction in oil prices since last summer, according to oil and gas consulting firm Rystad Energy. Crude inventories are currently at their highest level (471 million barrels) since at least the early 1970s and will likely increase further as production continues to climb. Rapid production increases from shale drilling and hydraulic fracturing in recent years have been blamed for the significant decline in oil prices. From Rystad Energy's perspective, oil prices will not begin to climb higher until oil supplies begin to shrink after peak production is reached. In their view, that could occur around September, based on their rig count assumptions.

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.