A weak end to a turbulent quarter
March ended with U.S. indices down, as the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq declined 1.85 percent, 1.58 percent, and 1.26 percent, respectively. After brief gains at the start of the month, markets moved lower and remained there for most of March.
Weak economic reports hit the market during the month, with declines in personal spending and vehicle sales in early March setting the tone. Weak retail sales reported later in the month preserved the downbeat atmosphere, despite the strong employment growth reported.
For the first quarter as a whole, the news was better, with U.S. markets reporting gains in the face of weak March results. At quarter-end, the Dow had a marginal gain of 0.33 percent, while the S&P 500 did somewhat better, gaining 0.95 percent. The Nasdaq was the winner for the quarter, up 3.48 percent, on strong results in technology and biotechnology stocks.
Fundamentals were weak during the quarter, as earnings projections dropped for the first half of the year. Between the strong dollar, which adversely impacted foreign sales and profits, and the collapse in oil prices, which hammered energy companies, first- and second-quarter earnings estimates went negative, although growth estimates for the second half of 2015 remain strong. Declining growth expectations-combined with rising perceptions that first-quarter U.S. growth would also be below expectations, as well as speculation about the timing of a pending Federal Reserve (Fed) increase in short-term interest rates made investors more cautious.
Technical factors were generally strong, although the Dow and S&P 500 closed the quarter close to their 100-day moving averages, and markets closed the quarter well above levels that could be considered red flags.
International markets performed similarly for the month, though much better for the quarter. The MSCI EAFE Index was down 1.52 percent in March but up a much stronger 4.88 percent for the quarter based on indications of a nascent recovery in the European economy. The MSCI Emerging Markets Index was down 1.59 percent for the month but up 1.91 percent for the quarter. Both indices benefited from an improved trade position, as the U.S. dollar strengthened.
Technical factors
were weak for international markets during most of the quarter, although they improved toward quarter-end. Developed international markets closed above their 200-day moving averages at the end of March. In addition, although the emerging markets index spent most of the three-month period below this critical level, at quarter-end it was moving back up and getting close to its 200-day moving average. Arguably, this could be considered a positive sign for international markets going forward.
Within fixed income markets, March showed significantly different results in different sectors. The Barclays Aggregate Bond Index had another strong month, up 0.46 percent and capping a gain of 1.61 percent for the quarter. But weakness in the energy sector, weighed on the high-yield sector, a previous outperformer; the Barclays Capital U.S. Corporate High Yield Index posted a 0.55-percent loss for the month despite gaining 2.52 percent for the quarter.
U.S. economy takes a winter nap
A principal cause of the March decline in U.S. markets was a series of poor economic reports during the quarter. Personal spending dropped, driven by declines in vehicle and retail sales. Business investment also dropped, with spending on durable goods down as well. Another factor driving weakness was the effect of the strong U.S. dollar, which hit exports and drove factory activity down. Manufacturing surveys also indicated lower business confidence.
Probably the biggest negative economic data, though, was the March employment report, which showed job growth well below expectations, at 126,000, along with downward revisions to the previous two months. Employment had been the one area of the economy that had continued to perform strongly, so this weak report was concerning.
But the weak data notwithstanding, the underlying trends continued positive. Job growth over the past year has remained above the highest level of the mid-2000s and consistent with the late 1990s (see chart). Other data suggests that the employment market remains strong, with voluntary quits at a seven-year high and the unemployment rate, at 5.5 percent, approaching normal levels. Moreover, initial jobless claims as a percentage of the labor force have dropped to the lowest level on record. Robust job growth has also led to strong growth in personal incomes, up a healthy 0.4 percent at the end of March.
Despite the gap between income growth and spending, fundamentals remain strong. In fact, as the savings rate rises, the sustainability of the recovery actually becomes stronger.
Housing also showed improvement during the quarter. Sales volume for new and existing homes ticked up during March, despite snow and cold weather in the Northeast. Moreover, prices continued to increase for new and existing homes, suggesting that demand is still strong. Although the data has been mixed, the overall conclusion is that, despite some seasonal weakness and supply factors, the housing market remains healthy.
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Authored by Brad McMillan, senior vice president, chief investment officer at Commonwealth Financial Network.
All information according to Bloomberg, unless stated otherwise.