Market Perspective for April 10, 2015

Stocks rallied over the past week, as the Nasdaq led the major indexes higher with a gain of more than 1 percent heading into Friday trading. The Russell 2000 lagged with a gain of about 0.3 percent. Also of note, the Dow Transportation Index saw a very nice bounce, up more than 2 percent, following a particularly rough number of weeks.

Foreign markets were generally stronger. The MSCI EAFE gained about 1 percent, but it was slowed by the advance in the U.S. dollar versus the euro. The Nikkei fared better, gaining more than 2 percent.

These markets were all left in the dust by the surge in Hong Kong listed Chinese companies. The Hang Seng Index gained 7.9 percent on the week thanks to the rally in Chinese shares, which gained more than 10 percent on the week. Back in November, China opened the mainland market to foreign investors and the Hong Kong market to mainland investors. In late March, China allowed mainland mutual funds to also invest in Hong Kong, and the result has been a race into the market.

Since the rules were announced, iShares China Large-Cap (FXI) has gained 18 percent and Guggenheim Small Cap China (HAO) has gained 30 percent. These gains come on the heels of a rapid run-up in mainland shares; over the past nine months, the Chinese mainland market is up about 95 percent. This week we saw a chart of the Shanghai Composite that looks very similar to the Nasdaq in 1999. Bloomberg has an article, Hong Kong Housewife Cheers Stocks as Workers Trade at Lunch, wherein people liken investing to gambling in Macau, and a security guard trades stocks on his lunch break. Like other investment manias before it, this one will come to a costly end for most involved.

Back home, economic data was solid. Wholesale inventories climbed 0.3 percent in February, which will increase the GDP growth estimate for the first quarter. Import prices fell 0.3 percent in February thanks to the strong U.S. dollar, even as oil prices rebounded during the month. Job openings ticked up in February and unemployment claims last week were lower than expected. That latter figure is a sign that the weak jobs report for March may be a blip instead of a trend, which is good news for the economy.

Bond yields ticked higher in the U.S. thanks to positive data, but overseas rates remain severely depressed. The Swiss government made history when it sold a 10-year bond at an interest rate of negative 0.055 percent. The U.S. dollar strengthened versus the euro during the week, but it weakened against emerging market currencies. Oil jumped to start the week, but then retreated when inventory builds came in well above expectations. Gold prices rallied along with the U.S. dollar, helped by news of a doubling of Indian imports versus last year.

Healthcare continues to retain its leadership in 2015 with a solid performance on the week. Other sectors were more subdued, with energy a distant second. Utilities were the weakest sector, down more than 1 percent as interest rates increased. REITs fared worse and came into Friday with losses of more than 3 percent. The biotechnology subsector was sitting on gains of more than 4 percent, as was the pharmaceutical subsector. Solar had gains of 3 percent and semiconductor shares were up nearly 2 percent.

Finally, as for the looming rate hikes by the Federal Reserve, the minutes from the previous Fed meeting were a mix of dovish and hawkish opinion. Overall, “the market” is now expecting rate hikes a bit later rather than sooner in 2015. One issue deterring some members from supporting earlier rate hikes is the strong dollar and low oil prices. Unless we see surprisingly strong economic growth over the next two months, particularly in employment and wages, rate hikes are going to come in the latter half of the year.  That said, we still urge you to be mindful of your bond investments.

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