Most of the significant economic elements from the end of 2014 carried into the first quarter of 2015, including the abnormally low price of oil, a strong U.S. dollar, and the ongoing financial experiment of the Federal Reserve. The European Central Bank’s decision to implement a negative deposit rate (-0.10%) last June has become kitchen table talk and began to foster some growth in the European economy.
Returns and Valuations by Style
Since the S&P 500 return was sideways in the first quarter, investors who were willing to take on more risk in the U.S. small
capitalization growth style equity market generally fared better than their large capitalization “value” style peers. The difference in performance by size and style was a reversal from the trend in 2014.
Energy Supply Demand and Prices
The price of oil, hovering around $50 per barrel, has continued to dominate the headlines and impact GDP forecasts. On the slide, you’ll see U.S. productionincreasedby20.8%since2013whileconsumptiononlyincreasedby2%. The oversupply from the U.S. is projected to continue despite the absence of marginal producers that could not compete in the current marketplace. Generally, economists were expecting a 1% bump to GDP from the stimulus created by lower oil prices but the meteoric rise in the value of the dollar is already causing a drag on exports and the economy.
Global Equity Markets
Last year, we talked about the drag a strong U.S. dollar had on international equity investments when reported in U.S. Dollars. In the bottom half of the slide, you’ll see a striking difference in performance of each country’s equity index when shown in the “local” currency versus U.S. Dollars. In just the first quarter of 2015, the German DAX 30 Index gained 22% but, as a result of the weaker euro, it gained just 8.4% when measured in U.S. Dollars. Big exporting firms outside the U.S. are benefiting from the U.S. dollar strength as well as low oil prices for heavy users of energy.
Manufacturing Momentum
The Purchasing Managers Index (Manufacturing PMI) is used as an indicator to compare manufacturing momentum internationally. There are a handful of countries that are still weak but, in aggregate, the global growth is noticeable and strong. The U.S., U.K., Ireland, and Mexico stand out as the strongest while Russia, Brazil, Indonesia, and Australia are losing momentum.
Conclusion
With offsetting factors dominating the forecasts for GDP growth, it is no surprise that the minutes from the Federal Reserve Open Market Committee show a divergence of opinions on whether a rate hike would be warranted as early as the June meeting or delayed until September. As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance. Loss aversion continues to weigh heavily in portfolio construction.