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Voya Perspectives | Market Series | March 12, 2015
Market Review
February 2015: Blacking out the Friction
Though the factors that inhibited domestic equity markets at the start of the year — including weak oil prices, uncertain global
economic growth and renewed political tumult in Europe — haven’t gone away, they faded enough in February for investors to send
many indexes back near all-time highs. However, the unprecedented wind-down of extraordinary Fed accommodation, looming ever
closer, isn’t likely to be as easily dismissed.
Fed Moves Closer to Hike as Europe Shows
Signs of Life
Daniel P. Donnelly
Head of Investment
Communications
The employment picture in the U.S. continues to improve
— and continues to fuel speculation that the Federal
Reserve is likely to introduce its initial interest rate hike
sooner rather than later. In fact, following the latest
nonfarm payrolls report, fed funds futures suggest
the market is assigning a 41% probability of rate hikes
following the July FOMC meeting and a 62% chance
by September. The economy added 295,000 jobs in
February, well ahead of expectations for 240,000, and the
unemployment rate edged down 20 basis points to 5.5%,
its lowest level in almost seven years. Despite payroll adds
averaging 275,000 per month over the last year, however,
labor market slack persists. Wage growth disappointed
in February, rising only 0.1% on the month after a robust
0.5% increase in January, while the labor-participation
rate also remains pegged near historical lows. And
although the latest Job Openings and Labor Turnover
Survey (JOLTS), a favorite indicator of the Yellen Fed,
showed job openings at a 14-year high, the rate of quits
remains more than 10% below pre-recession levels.
Domestic data flow in general has been a bit soft of
late. In February the ISM manufacturing index declined
to its lowest rate of expansion in a year due in part to
weak international demand and the supply disruptions
that have resulted from labor strife at West Coast ports.
Housing data have been mixed, and consumer confidence
pulled back from recent highs. These uninspiring results
are consistent with the fourth quarter slowdown that
followed a third quarter during which GDP grew at its
fastest pace in 11 years. The initial Commerce Department
fourth quarter growth estimate of 2.6% proved aggressive
and was subsequently restated at 2.2%, due mostly to
a smaller increase in private inventories than originally
thought. More recent data, however, suggest this cut may
have been too deep; revenue at health care and social
assistance companies grew sharply in the fourth quarter
and should add a few basis points to the third statement
of growth released toward the end of March. Regardless
of the final GDP reckoning, the expansion proved sufficient
to drive corporate earnings higher. With nearly all S&P
I N V E S T M E N T M A N AG E M E N T
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500 companies having reported fourth quarter 2014
results, the blended earnings growth rate stands at 3.7%,
according to FactSet. Analysts began the fourth quarter
expecting S&P 500 earnings growth of 8.4% only to whittle
forecasts all the way down to 1.7% by the time the quarter
was over as they accounted for the freefall in oil prices and
its impact on the energy sector. Current estimates of first
and second quarter 2015 growth call for year-over-year
declines of 4.6% and 1.5%, respectively, as adjustments to
energy sector expectations continue to cycle through.
In Europe, negotiators once again backed away from
the precipice of breakup, providing a four-month bailout
extension to Greece and its feisty new left-wing leadership
bent on undoing the crippling austerity to which the
country has been subjected. While the allowance was
shorter than the six months Greece had requested, it
puts off the possibility of a “Grexit” for now and gives the
interested parties space to perhaps hammer out a longerterm solution.
It may also buy some time for the green shoots of
European growth — there’s a phrase not seen in a while —
to truly take hold. Euro zone GDP accelerated somewhat in
fourth quarter 2014, posting an annualized growth rate of
1.4% thanks to relative strength in Germany and Spain. And
more contemporary data pointed toward some hopeful
signs across the region as we entered 2015. Retail sales
rose 1.1% in January, the largest monthly increase since
May 2013; the annualized figure of 3.7% hearkens back to
2005. Consumer spending has risen for four consecutive
months, the first such string since records began being
kept in 2000. Though the unemployment rate remains at
an uncomfortably high 11.2% even after trending down
steadily over the last 18 months, consumer confidence is
on the upswing thanks to the lower energy and fuel costs
that have accompanied the collapse of oil prices. Also
providing a tailwind to the region is the cheaper euro,
which is trading near 12-year lows versus the dollar after
falling nearly 25% over the past year, making European
exports more competitive on world markets. And with the
European Central Bank kicking off its €1.1 trillion bondbuying program in early March as the Fed readies the
launch of a tightening cycle, dollar parity is more likely
Voya Perspectives | Market Series | March 12, 2015
than a euro rally in the near term. All this has the ECB in a hopeful mood.
The central bank is now forecasting 2015 growth of 1.5% and 2016 growth
of 1.9%, up from its previous expectations of 1% and 1.5%, respectively. It
also expects deflationary pressures to dissipate and inflation to approach
its near-2% target by 2017.
At 7.4%, China’s 2014 GDP growth rate was the slowest for the world’s
second-largest economy in nearly a quarter-century and fell short of the
government’s target of 7.5%. Recent messaging from Beijing — as well as
a raft of disappointing data to start this year — suggests that we’re all just
going to have to get used to the “new normal” as the country continues
its long, slow shift to a consumer-driven model. At the opening of China’s
annual parliament, Premier Li Keqiang identified a 2015 growth rate
bogey of about 7%, citing such challenges as sluggish investment growth,
overcapacity, deflationary pressures and demand for improved social
services. But while China slows, an Asian neighbor to the west gathers
steam. The International Monetary Fund expects India to post GDP growth
of 7.2% for the fiscal year ending in March 2015 and 7.5% in the fiscal year
that follows, up from previous forecasts of 5.6% and 6.3%, respectively.
Domestic Equities Come Roaring Back
Though U.S. equities got off to a shaky start to 2015, a strong
February had them back on track. While the S&P 500 Index and Dow
Jones Industrial Average posted impressive gains of 5.5% and 5.6%,
respectively, it was the Nasdaq that shone brightest among the big three;
its 7.3% advance left the tech-heavy bourse on the precipice of 5000 — a
level it has not seen since 2000. Nine of ten S&P 500 sectors reported
positive results for February, led by consumer discretionary, information
technology and materials; utilities was the only sector to decline during
the month. In terms of capitalization, performance was similar, though
small caps held a slight advantage. Growth stocks outpaced value by a
wide margin across capitalizations.
International developed markets, meanwhile, built on the comparative
strength they exhibited in January. The MSCI EAFE Index surged 5.8%
in February to bring its year-to-date advance to 6.2%. Europe was the
driver here, while Pacific ex-Japan was relatively weak. Austria, Ireland
and Portugal were among the top performers for the month, while Hong
Kong, Singapore and Israel were the only developed markets to finish
in the red. Emerging markets also continued to show promise this year
after a difficult 2014, moving ahead 3.0% in February. Eastern Europe and
Europe were notably strong, while Latin America and the Far East lagged.
In terms of local markets, Russia delivered a monthly return in excess
of 20%, while Greece and Hungary also impressed. Egypt, Turkey and
Colombia were among the markets to lose ground.
Fixed Income Gives Up Ground
After plunging in January, interest rates bounced back as investors
perceived the start of a Fed tightening cycle looming ever closer. Yield
on the benchmark ten-year Treasury ended the month around 2.00%,
up sharply from end-January’s 1.68%. The widely watched Barclays U.S.
Aggregate lost 0.7% during February, while Treasuries shed 1.3%. After
a 27%-plus return in 2014 and a 9% gain in January, Treasuries with
maturities in excess of 20 years fell more than 5% in February. Most
sectors of the fixed income market delivered negative absolute returns
while outpacing Treasuries; high yield bonds were a notable exception,
delivering a gain of more than 2%. Global bonds, emerging market debt
and senior loans lagged. Yields on money market instruments — such as
Treasury bills, short-term agency securities and high-quality commercial
paper — remained very low throughout the month as the fed funds target
rate traded within the 0.00–0.25% range. Libor rates moved higher.
The year-to-date choppiness in interest rate, currency and spread
markets is a testament to the uncertainty surrounding the ability of
the U.S. to withstand the challenges facing it. While the uncertain
environment is likely to spawn bouts of volatility, global conditions remain
accommodative thanks in part to central banks in Europe and Japan.
Domestically, economic data is more likely to be near a local trough than
at the beginning of a leg down, and low inflation will allow the FOMC to
move patiently. Fixed income markets like high yield and CMBS offer an
attractive entry point in a credit cycle that has further to run.
The Standard & Poor’s 500 Index is an unmanaged capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
The Nasdaq is a computerized system that facilitates trading and provides
price quotations on more than 5,000 of the more actively traded over the
counter stock.
The Dow Jones Industrial Average is a price-weighted average computed from the
stock prices of 30 of the largest and most widely held public companies in the United
States, adjusted to reflect stock splits and stock dividends.
The MSCI EAFE Index is a free float-adjusted market capitalization weighted index
designed to measure developed markets’ equity performance, excluding the US &
Canada, for 21 countries.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index
that measures emerging market equity performance of 22 countries.
The Barclays U.S. Aggregate Bond Index is an unmanaged widely recognized,
unmanaged index of publicly issued investment grade U.S. Government,
mortgage-backed, asset-backed and corporate debt securities.
The indexes do not reflect fees, brokerage commissions, taxes or other expenses
of investing. Investors cannot directly invest in an index.
Past performance does not guarantee future results.
This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or
solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein
reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that
are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events
to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to,
without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and
regulations and (6) changes in the policies of governments and/or regulatory authorities.
The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is
not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.
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