Peek of the Week
June 1, 2015
The Markets
Is it possible to have an economic optical illusion?
On Friday, the Commerce Department reported the U.S.
economy contracted at an annualized rate of 0.7 percent during the first
quarter of 2015. The Federal Reserve sees things slightly differently.
Previously, the Commerce Department had reported our
gross domestic product (GDP), which is the value of all goods and services
produced in the United States, had increased at an annualized rate of 0.2
percent during the first quarter. The estimate was weaker than economists had
expected and caused some analysts to wonder whether the economic recovery was
stalling.
Weak first quarter GDP has caused other analysts,
including those at the Federal Reserve Bank of San Francisco who penned an
article entitled, The Puzzle of Weak
First-Quarter GDP Growth, to wonder whether a statistical anomaly is
causing first quarter GDP growth to appear weaker than it really is. Barron’s explained it like this:
“Since the expansion began in mid-2009, there have
been six calendar quarters that have included the January-March quarter; for
those six quarters, the average rate of growth has been just 0.4 percent. For
the other 17 calendar quarters, growth has averaged 2.8 percent. One reason for
this pattern seems to be faulty seasonal adjustment in the first quarter… In
any case, if the same pattern persists in 2015, expect a rebound in the current
quarter and through the second half of this year. And, based on data released
so far, one source of the rebound would be a pickup in housing.”
The San Fran Fed report concluded, “There is a good
chance that underlying economic growth so far this year was substantially stronger
than reported.”
While GDP was revised downward last week, the core
consumer price index (CPI), which is a measure of inflation that excludes food
and energy, showed inflation increasing for the first four months of the year.
If it continues apace, by year-end the CPI will rise above the 2 percent
inflation target set by the Fed and will probably set the stage for an increase
in the Fed funds rate.
Investors weren’t thrilled with last week’s news, and
markets generally moved lower.
Data as of 5/29/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.9%
|
2.4%
|
9.8%
|
16.5%
|
14.5%
|
5.9%
|
Dow Jones Global ex-U.S.
|
-2.0
|
6.4
|
-2.3
|
9.7
|
6.0
|
3.7
|
10-year Treasury Note (Yield Only)
|
2.1
|
NA
|
2.5
|
1.7
|
3.3
|
4.0
|
Gold (per ounce)
|
-1.1
|
-0.7
|
-5.1
|
-9.0
|
-0.6
|
11.1
|
Bloomberg Commodity Index
|
-1.5
|
-3.2
|
-25.1
|
-8.4
|
-4.0
|
-3.9
|
DJ Equity All REIT Total Return
Index
|
-1.1
|
-1.7
|
9.9
|
11.9
|
14.3
|
8.0
|
S&P 500, Dow Jones Global
ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends
(gold does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT Total Return Index does include reinvested
dividends and the three-, five-, and 10-year returns are annualized; and the
10-year Treasury Note is simply the yield at the close of the day on each of
the historical time periods.
Sources: Yahoo! Finance,
Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no
guarantee of future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable.
IF America’s Growth is slowing, the United States was The Little Engine That Could during 2014. We added three million
jobs, unemployment fell to 5.6 percent, and GDP grew by 2.4 percent for the
year. Unfortunately, despite the contentions of the San Francisco Federal
Reserve’s report, we appear to be losing momentum.
So,
what happened?
The Economist reported a variety of factors have contributed to the
slowdown. The U.S. dollar has gained 20 percent in value against the euro
during the past year, which made exports more expensive. In fact, exports were
down about 3 percent, year-over-year, in March. Also, oil prices fell, which knocked
0.8 percentage points off economic growth as investment in mining structures
shrank. Finally, American consumers didn’t spend as much as experts anticipated
they would, despite lower oil prices. Lower-than-expected spending may reflect weak
wage growth.
While
growth in the United States shows signs of slowing, the Eurozone’s growth is
accelerating. The region emerged from a double-dip recession in the spring of
2013, according to The Economist. Many
large country’s economies, including those of Spain and France, delivered
relatively strong GDP growth during the first quarter of 2015. As a whole, the
Eurozone grew by 0.4 percent during the quarter, outperforming the United
States.
Why
is the Eurozone doing so well?
The
European Central Bank took a page from the Federal Reserve’s playbook and began
a round of quantitative easing (QE). QE has contributed to the euro losing
value against the U.S. dollar, which has helped Eurozone exports. Also,
consumers in the Eurozone have been spending the windfall created by lower oil
prices.
Will
the United States and the Eurozone be able to sustain positive economic growth?
Only time will tell.
Weekly
Focus – Think About It
“There is nothing noble in being superior to your
fellow men. True nobility lies in being superior to your former self.
--Ernest Hemingway, American
author
Best regards,
Leif M. Hagen
Leif
M. Hagen, CLU, ChFC
LP Financial Advisor
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general. You cannot invest directly in
this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees, expenses, or sales charges. Index performance is not indicative of the
performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year
Treasury Note as a benchmark for the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association. The
gold price is set twice daily by the London Gold Fixing Company at 10:30 and
15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
