2015 Q1 Capital Markets Review - L&S AdvisorsQ1 Capital Markets Review The first quarter of 2015 was...

2015 Q1 Capital Markets Review

Q1 Capital Markets Review The first quarter of 2015 was characterized by confusion in economic data. Market focus shifted between fundamental economic conditions and the Federal Reserve, as the potential for rising interest rates was eyed. Lack of clear direction in either translated into a volatile and ultimately flat quarter in equity markets, as the S&P 500 ended the quarter up only 44 bp. Although some headline “noise” – i.e. the late-January election of anti-austerity party Syriza in Greece – distracted markets somewhat, central banks and economic data were the market movers in Q1. Accommodative ECB and Bank of China policy contrasted with the Federal Reserve gearing up to raise rates. In Europe, the ECB initiated a broader-than-expected quantitative easing program, providing a strong boost to European equity markets. In the United States, focus intensified on the Fed, as every word – notably, the word “patience” – was parsed for a hint as to the timing on a potential 2015 interest rate hike. Ultimately, however, markets followed data, as strong US data in the fourth quarter of 2014 gave way to a confused and blurred economic landscape in 2015. Economists blamed poor weather, the west coast port shutdown, the negative effects of weak oil prices on the energy industry, and the strong US dollar for the mixed US data. In the Eurozone, Germany improved throughout Q1, while other countries struggled before seeing improvement in March. In China, weak economic conditions for much of Q1 were offset by accommodative monetary policy from the Bank of China. The overall effect was a general lack of clarity, which translated to equity markets. Although February was a strong month, with the S&P 500 gaining 5.5%, January and March were volatile months of market weakness; consequently, the S&P 500 was almost flat in Q1. The following indicators are representative of the overall economic climate in the first quarter of 2015.

January:

• January was characterized by a lack of clarity in economic conditions, and a

corresponding lack of clarity in equity markets. Lackluster economic growth was augmented by less-than-stellar fourth-quarter earnings, the never-ending “Grexit” tragedy out of Greece, and a nascent feeling that the worldwide quantitative easing (QE) cycle has reached the limits of encouraging growth.

• The S&P 500 index ended a very volatile month with losses of 3.1% as investors failed to find clear direction in the new year.

Q1 Capital Markets Review January

US Durable Good Orders, January 2010 – January 2015

• US durable goods orders declined for the second straight month, dropping to their lowest level since February 2014.


150000

190000

230000

270000

310000

US Consumer Confidence, January 2010 – January 2015

Q1 Capital Market Review January

• Consumer confidence in the US continued to push higher, with surveys from both the Conference Board and the University of Michigan reaching pre-2008 Recession levels.

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

University of Michigan Conference Board

US 10-Year Treasury Bond Yield, January 2012 – January 2015


1

1.5

2

2.5

3

3.5

• US Treasury bond yields dropped precipitously in January, reaching their lowest levels since mid-2013. Falling treasury yields usually imply a “flight to safety” out of equities, which in turn implies a bearish equity environment.

ECRI Weekly Leading Index, January 2010 – January 2015

Conference Board LEI Headline Index, January 2006 – January 2015


115.00000

120.00000

125.00000

130.00000

135.00000

140.00000

• Leading economic data presented a mixed picture. While the ECRI’s Weekly Leading Index declined in January, the Conference Board’s Leading Economic Index continued to appreciate, hitting levels not reached since 2007.

90

100

110

120

130

S&P 500 Index, January 2015

• January was a volatile month for the S&P 500 index, which experienced a number of price swings and ultimately declined 3.1%.


1980

1995

2010

2025

2040

2055

2070

Q1 Capital Market Review February

February:

• Although economic conditions in the Eurozone showed signs of recovery,

conditions in the US and China remained mixed-to-negative. However, markets received a boost from dovish comments out of the Federal Reserve on January 28, as well as the apparent stabilization of oil markets.

• The S&P 500 index rebounded 5.49% in February, as lack of clarity in core

economic data shifted market focus to an easing of geopolitical concerns in Europe and accommodative monetary policy from the Fed.

China Manufacturing PMI Survey, February 2010 – February 2015

• German economic activity improved for the second consecutive month, remaining at stable growth levels. By contrast, the official manufacturing numbers published by the Chinese government were contractionary for the first time since 2012.

Germany Composite PMI Survey, February 2010 – February 2015

Q1 Capital Markets Review February

45

49

53

57

61

65

47.0

48.0

49.0

50.0

51.0

52.0

53.0

54.0

Architectural Billings Index, February 2010 – February 2015


• The Architectural Billings Index, which measures future construction activity, was contractionary for the first time in nine months.

• The ABI is regarded as a forward-looking measure of economic activity. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

40.0

42.0

44.0

46.0

48.0

50.0

52.0

54.0

56.0

58.0

US Initial Jobless Claims, February 2012 – February 2015

• Although initial jobless claims increased somewhat, they remained at relatively low historical levels, and the US jobs market remained strong at only 5.7% unemployment.


250000

290000

330000

370000

410000

450000

NYSE Oscillator Moving Averages, February 2014 – February 2015

• Price and issue momentum was to the upside on the S&P 500, as both the index’s own short-term moving average and the advance-decline moving average (measured by the oscillator) moved above the long-term moving average, indicating bullish technical momentum.

S&P 500 Moving Averages February 2014 – February 2015


1700

1750

1800

1850

1900

1950

2000

2050

2100

2150

-0.02

-0.015

-0.01

-0.005

0

0.005

0.01

0.015

0.02

0.025

c

Price of Crude Oil, February 2010 – February 2015


• After several months of constant declines, crude oil prices finally stabilized and appreciated in February.

• Although the crash in oil prices has been attributed to supply, oil price stability provides support for the energy industry, which constitutes a significant portion of the US economy.

0

20

40

60

80

100

120

140

Brent Crude WTI Crude

S&P 500 Index, February 2015

• Accommodative central bank policy and oil market stabilization provided short-term stability to markets, which finished the month of February with gains of 5.49%.


2020

2040

2060

2080

2100

2120

Q1 Capital Markets Review March

March:

• Already weak US economic conditions failed to improve in March. Furthermore, the Federal Reserve indicated a desire to raise interest rates sooner rather than later, and oil markets resumed their slide after stabilizing in February.

• High levels of turbulence characterized March, as the anchors that had previously provided strength to the US market – a dovish Fed, stabilizing oil markets, and in Q4, strong economic conditions – gradually slipped away. However, forward-looking economic indicators continued to imply strong long-term economic conditions.

US Retail Sales, March 2010 – March 2015

• The ISM manufacturing index declined for the fourth consecutive month (first time since 2008), while US retail sales declined for the third consecutive month (first time since 2012).

ISM Manufacturing Index, March 2010 – March 2015


47.0

49.0

51.0

53.0

55.0

57.0

59.0

61.0

350,000

370,000

390,000

410,000

430,000

450,000

Price of Crude Oil, March 2014 – March 2015


• The price of crude oil failed to continue climbing in March. • In particular, WTI crude – which measures the price of US crude oil – dropped to multi-year

low levels before stabilizing somewhat in the last week of March.

40

50

60

70

80

90

100

110

120

Brent Crude WTI Crude

US Nonfarm Payroll MoM Change (6-month smoothed), March 2011 – March 2015

• The US jobs market continued its recent healthy growth in March, adding 264,000 jobs.

• Near-term averages stayed at multi-year high levels, as the continued strength in the jobs market presented a counterpoint to weakness in US manufacturing.


100000

140000

180000

220000

260000

300000

Architectural Billings Index, March 2010 – March 2015

ECRI Weekly Leading Index, March 2010 – March 2015

Q1 Capital Markets Review March • Leading indicators presented an optimistic long-term economic picture. The ECRI Weekly

Leading Index showed signs of reversing into more consistent gains, while the Architectural Billings Index was expansionary after briefly falling into contraction.

115.00000

120.00000

125.00000

130.00000

135.00000

140.00000

44.0

46.0

48.0

50.0

52.0

54.0

56.0

S&P 500 Index, December 2014

• As the stabilizing forces that lifted markets in February – accommodative central bank policy, improving oil prices – slipped away, market focus turned to weakening near-term economic conditions, and the S&P 500 index declined 1.7% in March.


2040

2060

2080

2100

2120

Global Economic Indicator Descriptions

The ISM Manufacturing Index is a survey-based measure of manufacturing conditions in the United States. The Germany Manufacturing PMI Survey is a survey-based measure of manufacturing conditions in Germany. The China Manufacturing PMI Survey is a survey-based measure of manufacturing conditions in China. The S&P 500 is a value-weighted index of 500 widely held common stocks, whose performance reflects changes in stock market conditions. The NYSE Oscillator is a measure of momentum on the NYSE given the number of advancing and declining stocks. The S&P 500 moving averages is a measure of pricing momentum on the S&P 500 index. The ECRI Weekly Leading Index is a forward looking measure of US economic activity. The Conference Board Leading Economic Index (LEI) is a forward looking measure of US economic activity. The US Nonfarm Payroll MoM Change report is a measure of the monthly change in the number of employed persons in the US as estimated by a survey of approximately 60,000 households. The US Retail Sales MoM Change report is an index measuring the monthly change in adjusted US retail and food service sales.

Global Economic Indicator Descriptions

The Price of Brent Crude Oil is a benchmark that measures global crude oil prices. The Price of WTI Crude Oil is a benchmark that measures US crude oil prices. The US 10-Year Treasury Bond Yield is the interest rate on the bond issued by the United States government that matures in 10 years. The US Durable Goods Orders is a measure of the demand for durable goods manufactured in the US. The Conference Board Consumer Confidence Survey is a measure of United States consumers’ outlook on economic conditions. The University of Michigan Consumer Confidence Survey is a measure of United States consumers’ outlook on economic conditions. The Architectural Billings Index is a leading economic indicator that measures nonresidential construction activity in the United States. The US Jobless Claims report is a weekly measure of the number of claims filed for United States jobless benefits.

Disclosure

L&S Advisors, Inc. is a privately owned corporation headquartered in Los Angeles, CA. L&S Advisors was originally founded in 1979 and dissolved in 1996. The two founders, Sy Lippman and Ralph R. Scott, continued managing portfolios together and reformed the corporation in May 2006. The firm registered as an investment adviser with the U.S. Securities and Exchange Commission in June 2006. L&S Advisors performance results prior to the reformation of the firm were achieved by the portfolio managers at a prior entity and have been linked to the performance history of L&S Advisors. These results should not be interpreted as the actual historical performance of L&S Advisors. Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the strategies, markets, or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. All data for global economic indicators has been provided by Thompson Reuters. Data for the S&P 500 index has been provided by the Federal Reserve Bank of St. Louis.

2015 Q1 Capital Markets Review - L&S AdvisorsQ1 Capital Markets Review The first quarter of 2015 was...

Documents

Transcript of 2015 Q1 Capital Markets Review - L&S AdvisorsQ1 Capital Markets Review The first quarter of 2015 was...