John Davidson’s Economic Comments: Week ending May 16
This week, most economic releases were softer, but corporate earnings continued to surprise on the upside. For the Q1 earnings season, Factset reported that 75 percent of the companies that have reported this quarter, posted earnings above the mean of the estimates and 54 percent had reported sales above the mean of the sales estimates. The geopolitical and economic risk in the Ukraine continued to weigh on the equity markets. Bond yields fell but credit spreads were mixed on the week; bond markets posted positive returns for the week, QTD, and YTD. The U.S. dollar was mixed, but oil and metals commodity prices rose on the week.
Perspective:
This weekend I needed to spend more of my time reviewing economic and market events because I was out of touch with the markets for four days during the week. I was fly fishing on Indian Pond in northern Maine with three Amherst classmates. Hilton caught the most fish, having made a deal with the devil that allowed his stocks to go down in return for catching the most small mouth bass. Having reviewed the economic releases, I don't hold him solely responsible for this week's decline in stock prices. Ed and Jack, highly skilled fisherman, also caught many fish. All were highly supportive, when I, the least experienced, caught my share of the bass plus two salmon. Knowledgeable guides, good weather and great camaraderie made for a terrific trip — well worth any declines that Hilton may have had in his portfolio.
Economic Releases:
Federal Reserve Chair Janet Yellen's testimony in the previous week noted that housing was an area to be watched. This week's housing data should have been reassuring. Housing Starts (red in the chart) rose 13 percent to 1.027 million in April, above the range of expectations and 26 percent higher than they were a year ago. Multifamily units, which surged almost 40 percent, provided the primary boost for the good report. Also driven by multifamily units, Permits (blue in the chart) rose 8 percent to 1.080 million in April. Existing Home Sales will be reported next week.
On the disappointing side of the ledger, Industrial Production and Capacity Utilization fell in April. IP (blue in the chart) fell -0.6 percent, below the range of expectations. Similarly, Capacity Utilization (red in the chart) fell to 78.6 percent.
Other Economic Releases
April's U.S. Retail Sales were also near the low end of the range of expectations. Retail Sales rose only +0.1 percent; less automobiles, Retail Sales were flat. This week's release of PPI and CPI for April may have provided an early indication of inflationary pressures. PPI jumped +0.6 percent in April; less food and energy, PPI rose +0.5 percent, both above the range of expectations. CPI increased +0.3 percent in April; ex food and energy, CPI increased only +0.2 percent — still near the high end of the range of expectations. The year-over-year changes in PPI and CPI were well contained and likely to allow the Fed to continue to accommodate; falling interest rates this week indicated that these releases did not concern bond investors. The University of Michigan's Consumer Sentiment for Mid-May declined over two points to 81.8.
Also on the low end of the range of expectations were the European Union's Q1 GDP of +0.2 percent and March's IP of -0.3 percent. In contrast, Germany's Q1 GDP flash report rose +0.8 percent. Germany's ZEW Survey of Current Conditions rose, but Business Expectations fell in May. France's Q1 GDP Flash was flat. The UK's ILO Unemployment Rate fell a tick to 6.8 percent in April.
China's IP rose +0.82 percent and Retail Sales increased +0.83 percent in April. On the positive surprise side, Japan's Q1 GDP rose 1.5 percent, driven by business spending.
Equities Markets:
Positive earnings reports, geopolitical risks and softer economic data generated mixed results in the equity markets across the globe. Some of the best returns, this week, QTD and YTD came from the credit markets as a flight to safety drove interest rates lower and bond markets higher.
Bond Markets:
Bond markets rallied across the globe in a flight to safety and reaction to the softer economic data. Credit spreads were mixed with decreases in investment grade and emerging debt spreads and an increase in high yield spreads. (Note that the ML bond indices are quoted on a one-day delay, i.e. Thursday's prices instead of Friday's close)
Currencies & Commodities:
The U.S. dollar was mixed; it fell against the Yen and Looney, but rose against the European currencies. Oil and metals commodity prices rose on the week.
John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted from portfolio manager to chief investment officer and CEO.
Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.
He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.
His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.
His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.
Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.
Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.
In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.
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