The Nitty Gritty Details:
The broad averages are lower this morning as the correction in natural resources continues while the US dollar holds firm. Commodity prices are lower across the board, led by silver (down over 6%) and oil, corn and wheat (each down between 2 and 3%). Last night’s downbeat outlook from a well-known tech giant is also weighing on the averages this morning. Today’s heavy dose of economic data, including retail sales, producer prices, and weekly jobless claims, would not seem to alter the tepid growth and benign inflation picture. Overseas markets are broadly lower this morning by between 1 and 2%, with resources leading the way down. Asian weakness reflects yet another increase in China’s bank reserve requirements.
Looking back at Wednesday, the three-day winning streak for the S&P 500 came to an end as growth concerns centered around more tightening expected from the Chinese central bank along with a rally in the dollar drove stocks and commodities sharply lower. Bearish oil and gasoline inventory data, more selling pressure from recent increases in margin requirements, and prospects for higher supplies of crops around the world all weighed on the broad commodities complex. All S&P sectors finished lower on the session, led by the resource sectors; meanwhile, not surprisingly, the defensive sectors led by Consumer Staples held up best. Technology fared better than it might have otherwise on a major sector player’s dividend increase. Retail held up well as oil fell, offsetting a major entertainment company’s earnings-driven weakness.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
- More on the Health Care sector performance. Health Care is the top performing sector this year with a 14% return compared to 7% for the S&P 500. The sector has benefited from a number of factors, including: 1) the worst of the reform impact has likely passed, 2) the market is increasingly favoring defensive investments, 3) the pace of drug innovation has improved, and 4) investors are starting to see past the cliff of drug patent expirations and are focusing on longer-term growth prospects, including favorable demographic trends.
- This year’s “global growth story” is still intact despite the commodity pullback. This morning’s economic data in the United States all confirm continuing global growth. The recent pullback in commodity prices has some investors concerned that a replay of 2008 is at hand, when a crash in global commodity prices preceded the seizing up of global credit markets amid the subprime mess and the collapse of Lehman Brothers. Some of the key drives of the worst of the 2007-2009 Great Recession (freeze up of bank lending, overburdened consumers, stagnant incomes, collapsing labor market, declining earnings expectations) are not present today. While growth metrics may be slowing in part due to the Japanese earthquake-related supply chain issues, they are not likely to reverse. We continue to monitor the relevant data points closely as we track the path of commodity prices and the global recovery.
- What is the latest update on municipal bonds? Municipal bond performance has been impressive in recent weeks, along with the Treasury rally, and may be poised to slow. Several factors have benefited municipals, including: 1) proposals for tax increases to reduce the deficit, 2) continued decline in the default rate, and 3) a very light supply calendar. Low absolute yields, as well as a modest increase in the supply calendar, may challenge the market’s resilience in the weeks ahead.
- China tightens its monetary policy again. China continues to work aggressively to contain its inflation pressures with the fifth hike in bank reserve requirements this year – by 50 basis points to 21% – during the current cycle. The market expects further tightening measures from China in the weeks and months ahead. Through mid-April, markets had become comfortable with the scope of future monetary policy tightening in China, but over the last month, emerging market equities have begun to underperform U.S. equities as market participants price in a more sustained dose of rate hikes in China than was expected earlier in the year.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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