With the exception of the tech-heavy Nasdaq and the small-cap Russell 2000 Index, the broad stock market indexes are back at levels seen in November. The S&P 500 Index fell […]
Large-cap stocks slid into Wednesday of this week, continuing a corrective that began on March 3. Shares bounced strongly on Thursday, helped by a larger than expected drop in jobless claims. Payroll and unemployment data continue to be the brightest spots in economic reports. Small- caps stocks marched higher throughout the week, as the sector continues to outperform in 2015 thanks to the strong U.S. dollar.
Retail sales were solid in February. Sales increased 1.7 percent year-on-year, but were down 0.6 percent from January. The dip from January was primarily due to bad weather as the category that includes online retailers increased. Although the retail report was good, the dip in sales will hurt the current quarter’s GDP growth rate. The Atlanta Federal Reserve branch’s updated forecast is down to 0.6 percent growth this quarter.
The drop in the forecasted GDP came despite an increase in wholesale inventories in January. Increases in inventory are positive for GDP, while decreases in inventory are negative. On the other side, producer prices were weak, with producer prices falling 0.5 percent versus an expected increase of 0.3 percent.
West Texas Intermediate Crude hit $45 again on Friday morning, $1 above its low for the year as oil inventories climbed again. At the current pace of inventory growth, available storage facilities will max out in early summer. If that happens, inventory demand will cease and spot prices will likely resume their downward slide.
The other significant story of the week was the drop in the euro and the rise of the U.S. dollar. The U.S. Dollar Index broke through 100 this morning, the highest level since 2003. The pace of the dollar’s rise has been historic. It took more than 4 years for the dollar to fall from 100 to 80, but less than nine months for the dollar to rally from 80 to over 100. The euro was at $1.05 this morning and technical traders consider this the key price because it is the bottom of a long-term uptrend. From the viewpoint of technical traders, if the euro breaks the $1.05 level, it confirms the long-term breakout in the dollar.
With stocks mixed this week, only one major S&P 500 sector witnessing gains was the financial sector. Investors shifted their rate hike expectations forward in time and the Fed signaled a shift via Jon Hilsenrath of the The Wall Street Journal. The headline of his piece says it all: Fed Likely to Remove ‘Patient’ Barrier for Rate Increase as Soon as June. The patient language tells investors a rate hike is not coming in the next two meetings; if it is removed at next Wednesday’s meeting, the Fed could raise rates in June at the earliest or at any subsequent meeting. Banks benefit from higher interest rates because it makes lending more profitable and some investors are jumping into the sector ahead of the expected rate hikes.
Rate sensitive utilities and real estate stocks didn’t drop though. Utilities held up well over the week relative to the broader market, while the REIT sector outperformed the S&P 500. Both sectors had been selling off due to higher long-term interest rates, but did better as the 10-year Treasury yield fell. One possible confounding factor is that utilities, real estate and financials are all heavily exposed to the domestic economy. Investors may be bidding up all of these sectors as a response to the rising dollar, which could cut into exports. The two worst performing sectors this week were energy and the high exporting technology sector.
Small caps were also up this week, in absolute terms. The Russell 2000 Index gained 1.57 percent through Thursday’s close versus the 0.26 percent drop in the S&P 500 Index. Large multinationals in the S&P 500 will see their earnings dip due to the strong dollar, while small cap stocks are relatively insulated because they heavily rely on the domestic economy.
Download the Annuity Fund Data for March 2015 below: Click here to download the Excel version. Click here to download a static PDF version.
U.S. stocks opened modestly higher at the open and Treasury yields lower, both reversing course from last week. The major indexes remain within striking distance of their all-time highs despite last week’s small pullback. Technology has been driving the market, with the Nasdaq leading the way. Apple (AAPL), a top component of the Nasdaq (and soon the DJIA) will unveil its new smart watch this week.
There won’t be a lot of economic data released this week, paving the way for the bailout in Greece to retake center stage as European countries meet to discuss its debt restructuring plan. They could accept it or reject it at this meeting, or delay a decision. Greece’s finance minister Varoufakis said the country might decide to hold a referendum or new elections if the deal gets rejected. Many voters were unhappy with the Syriza-led government’s deal with creditors last month and a new vote would likely increase the power of the more radical factions.
The euro is likely to remain under pressure even if a Greek debt deal is approved because a large Austrian bank recently went bankrupt and it now looks like it could bankrupt the state of Carinthia. Since the debacle in Cyprus, bank failures are now being dealt with by forcing depositors to take losses, receiving bank equity instead of their money (the so-called “bail-in,” a policy now in force in most of the world). The Austrian government will not bail out the bank, and since Carinthia has a national guarantee on the bonds, it exposes them to a significant liability and potentially sending them into bankruptcy as well. Austrian banks are heavily exposed to Eastern Europe, a problem since 2008 and one that intensified as the war in Ukraine spread.
In the United States, interest rates will be in focus. Strong jobs data from February again has investors looking for an earlier rate hike from the Fed. Interest rates at the long end of the yield curve jumped last week, hurting rate sensitive sectors such as utilities and REITs. The financial sector also bounced on the news, as higher rates are more profitable for banks.
This is a very light week for economic data and earnings reports. Wholesale inventories for January are out on Tuesday; the number won’t move the market, but it will determine whether current GDP estimates rise or fall. Retail sales for February will be reported Thursday, along with business inventories for January. Also this week, China will report fixed asset investment data for the first two months of the year.
Earnings reports will be relatively light over the coming week. Barnes & Noble (BKS), Aeropostale (ARO), Dollar General (DG), Urban Outfitters (URBN) and Men’s Wearhouse (MW) are among those reporting. Solar has been attracting attention of late, so JA Solar’s (JASO) earnings will be closely watched.
A Seeking Alpha Contribution
In Part 1, we looked at the two giants in the international REIT space: the SPDR Dow Jones International Real Estate ETF (NYSEARCA:RWX) and the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI).
Three smaller funds in the mix are the WisdomTree Global ex-U.S. Real Estate ETF (NYSEARCA:DRW), the iShares International Developed Real Estate (NASDAQ:IFGL) and iShares International Developed Property ETF (NYSEARCA:WPS).
IFGL tracks the FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index. The fund tracks an index of real estate companies in developed markets. Theeligibility criteria include at least 75 percent of EBITDA from real estate-related activities. Unrelated activities include financing, construction and property management, holding companies, commodities storage, gaming, theme parks, and infrastructure. Companies must provide an audited annual report in English. Holdings are market cap-weighted, adjusted based on free float and foreign ownership restrictions…. To Continue Reading Please, Click Here.
