Stock Market Review: May 2014
Mixed Signals
Investors hoped that April would see the US economy pick itself up coming into the spring season. Instead, it was a month of mixed signals. Every piece of good news was tempered with discouraging footnote. March payroll data was encouraging and added more jobs than expected, but the unemployment numbers stayed almost unchanged. Home prices increased, but the number of new mortgages slumped. Consumers spent much more than analysts dared hope, but the economy grew at a much slower rate than predicted. Some of these disappointing numbers can be explained by the harsh winter, but investors remained cautious. The result was a lackluster month and most indexes remained either nominally positive or negative.
The GDP data clearly illustrates this trend. GDP is used as a measure of the overall health of the US economy and, for the first quarter of 2014, it was expected to grow by 1.1%. The actual figure was a major disappointment at 0.1%. On the same day that the GDP data provided such a sobering view of our economy, the US consumption numbers were released. Consumption is the measure of how much consumers spent during the quarter and that figure was very strong at 3.0%. These numbers are at odds with each other, but they offer hope that analysts are correct in blaming the harsh winter and that we will see a modest recovery by the end of the quarter.
China continues to worry investors. Its debt crisis continues to unwind and the People’s Bank of China (PBoC) is working to manage the consequences. Despite the efforts of the PBoC, Chinese companies are paring back their investments and preparing for a period of more careful growth. In spite of all this, the World Bank recently stated that it expects that China will surpass the US as the world’s largest economy by the end of 2014.
The situation in Ukraine is no less complicated than it was last month. The Ukrainian government is still in a difficult financial position. The European Union (EU), the United States, and the International Monetary Fund (IMF) are all putting together aid packages and loans to stabilize the Ukrainian economy. Unfortunately, Russia holds much of Ukraine’s debt and, in light of the current conflict, there are very few incentives for Russia to ease Ukraine’s debt burden.
While it may seem that Russia holds most of the cards in the Ukrainian conflict, western nations are working to pressure Russia into resolving the conflict. The US and the EU imposed more sanctions on Russia and promised to increase those efforts, if Russia continues to interfere in Ukraine. Meanwhile, the Russian economy remains weak, and still has not recovered from the global financial crisis of several years ago. Russia’s aggressive political stance has done nothing to reassure investors, and they are seeking investment opportunities in other emerging markets.
We expect that the economic data in May will set the tone for the summer. If those numbers show a significant improvement, then we will be able to attribute this winter’s weak data to the frigid weather. If the May data shows only a slight improvement, then analysts will be forced to revise their optimistic predictions for 2014 and investors will react accordingly which may increase market risk.
Market Movers
While US markets hit all-time highs during the early days of the month, there were significant reversals at several points as investors reacted to economic and political events. This market uncertainty tends to encourage investors to reduce the risk in their portfolios. The new-found caution displayed by investors pressured some equity sectors. Specifically, high-flying technology and pharmaceutical companies were the biggest losers for the month. Investors abandoned these growth industries, especially small-cap stocks, for larger companies with more modest growth potential. Foreign stocks saw a similar development, as large companies in developed economies saw the largest gains for the month. We maintain sizable international allocation, which paid off as foreign holdings outperformed the US. This move to limit risk was a common theme for the month and we saw it play out in each asset category.
Bonds certainly benefited from the attention of more conservative investors, and experienced an influx of investment. US inflation-protected bonds and long-term treasuries saw the largest gains. This is a stark departure from last year, when investors abandoned low-risk bonds. Treasury bond performance is often uninspiring, but that becomes very enticing during times of market upheaval. Although it has been unpopular over the recent months, our strategies include these types of bonds for precisely this reason.
Foreign bonds are not necessarily common among investors but represent a major component of our strategies and have performed exceptionally well in April. Similar to the pattern in the US, investors clearly preferred to invest in developed economies and highly-rated bond offerings on a global scale. In particular, investors took advantage of the higher yields offered by corporate bonds from developed countries as well as treasury bonds from emerging market countries. The majority of our foreign bond exposure remains high-quality which proved beneficial. As international investments are under pressure, we believe that this commitment to higher quality bond issuers remains an important aspect of our strategy.
With the exception of precious metals, Hard Assets responded well to the global uncertainty. Commodities experienced a small bump that added to their 2014 gains. However, Master Limited Partnerships and Global Real Estate posted more significant numbers. These less traditional investments provide investors with exposure to resources that are in demand even during difficult market conditions. In addition, Preferred Stocks and Convertible Bonds remain a bright spot in our portfolios. They continue to generate attractive income, while avoiding the more volatile swings that have afflicted stocks and bonds. The strong returns generated by this diverse group of alternative investments have contributed to the gains across our investment strategies.
Asset Categories Apr. 2014 / YTD
US Stocks -0.81% / 1.72%
Foreign Stocks 0.73% / 2.24%
US Bonds 0.74% / 2.58%
Foreign Bonds 1.58% / 4.69%
Hard Assets 1.92% / 5.75%
Hybrids 1.10% / 6.46%
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