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.
