10-15 Associates: Investor Newsletter Issue Nº 20
May 2014
Reading Tea Leaves?
By Deborah DeMatteo, Vice President &
Chief Investment Officer
The first month of every quarter
is generally the busiest month of the
quarter for data. Earnings season which
follows the close of each calendar quarter
provides us with not only the regular
monthly and quarterly economic data, but
a barrage of quarterly earnings as well.
This April has been no exception and has
been filled with surprises. Although the
market has traveled a lot of distance in the
first four months of the year, it has made
little net progress. But we can breathe a
sigh of relief that we have not seen a large
correction following the dramatic year we
experienced in 2013. In life very few
things are certain, in the markets probably
less so. As investors held their breath,
waiting to see how the weather impacted
earnings and economic data, there were
plenty of surprises to digest.
One of the broadest economic
indicators, GDP, a measure of economic
activity shocked investors registering
growth at an annual rate of.1%.
Expectations have been for growth of 34% and to think that the economy was
basically flat, caught many by surprise.
Speculation immediately followed that the
Federal Reserve would slow the rate of
tapering.
If the Fed is now data
dependent, zero economic growth could
certainly lead them off the path of
reducing stimulus. With a new Fed
Chairman, all ears were tuned in for the
Fed minutes in which they declared
“growth in economic activity has picked
up.” This led them to the conclusion that
they would continue to reduce the amount
of bonds they are purchasing at the rate
they had previously outlined. The market
therefore must have come to the
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conclusion that the lack of growth doesn’t
matter, because stocks continued their
sideways grind. We got back to the
excuse of the impact of weather and any
other thing that could influence the data
negatively. At the outset of the year, if you
said we were going to get zero growth, we
would assume the market would have a
good excuse to correct, but that was not
the case this month.
The unusually weak GDP data
was followed a week later by a better than
expected jobs number. The Bureau of
Labor Statistics reported that nonfarm
payrolls employment jumped by 288,000
in April. This is the largest monthly
increase in more than two years, and it
came along with upward revisions for
February and March, adding an additional
36,000 jobs. This gives us an average
monthly figure of 238,000 for the past
three months. This resulted in a plunge in
the unemployment rate to 6.3%, a decline
of .4%, the largest decline in more than
four years and the lowest rate since
September 2008. We have discussed in
previous months the importance of a job
recovery to sustain an economic recovery.
On hearing the headline number, it would
be assumed that the market would rally.
Not only was there no rally, but the
market closed down the day the data was
released. Just as the market excused bad
data for weather issues, it dismissed good
news based on the reality that
unemployment declined primarily due to
more people dropping out of the labor
force. We “created” 288,000 jobs, but
806,000 people stopped looking for work!
IF your confused by all of this, don’t feel
bad, so is everyone else.
www.1015associates.com
10-15 Associates: Investor Newsletter Issue Nº 20
In the meantime, earnings can be
characterized best as a mixed bag.
Although 67% of the companies that have
reported already have beat earnings, there
have been no significant signs of strength.
Again, like with the economic data,
investors seem to be willing to give a pass
to companies that fall short.
Long
discussions about the impact of weather
seem to be prevalent in many of the
conference
calls
and
earnings
commentary.
For example, portfolio
holding Johnson Controls, a strong
performer for 2013, came up slightly short
of earning for the first quarter. They have
exposure to auto’s and real estate, and
post earnings the stock is trading down
just very slightly. Investors seem content
to wait at least another quarter to see how
things look.
On the other hand,
companies that have had the ability to
beat earnings have not necessarily been
highly rewarded. In the energy patch,
Conoco Phillips, a name recently added
back to the portfolio beat by a wide
margin, and the stock is up just slightly
since they reported. Of course there are
outliers and some extremes, but for this
quarter earnings alone have not been
enough of a catalyst to move the markets
either direction.
The real action for the month
that has grabbed my attention and
thought, is what is happening in the bond
market. We closed out 2013 at the high in
ten year treasury rates for the year, slightly
north of 3%. All expectations were for
rising rates to continue into 2014 with the
Federal Reserve removing stimulus and
the economic recovery gaining strength.
Rates fell early on in the year, which we
could easily ignore in the short term due
to the unrest in Russia. However, as the
headlines in Russia dissipated, interest
rates for the month of April continued to
decline. Ten year treasury rates declined
from 2.73% to 2.67% representing a 2.2%
decline in rates. Thirty year rates eased
back by about 2.5% for the month, and
just when we thought that low mortgage
rates were in the rear view mirror, rates
are dropping once again. Low rates are
good for the economy and the market, but
declining rates are a signal of lack of
economic growth. If rates continue to
decline and continue to make new lows
for the year, it will become a worrisome
trend to consider. The stock market has
digested all the data and moved very little
for the year, exhibiting a lack of conviction
in either direction. Bonds however have
made a decided move to higher prices and
lower yields, expressing the sentiment
that the hope of an economic recovery may
be premature. There are plenty of other
reasons to explain the drop in rates, but
the trend that continued for the month of
April is one to take note of.
We continue to update the
portfolio given the moves in both bonds
and stocks. Given the significant moves in
both markets for 2013, I don’t think the
lack of a clear direction should be a
surprise to anyone.
Patience is a
fundamental quality of long term
investment success. As we layer on
another round of data, it will provide us
with another piece of the puzzle. The
market will never provide all the answers;
it’s our job to keep asking the right
questions.
May 2014
Deborah DeMatteo has more than 30
years of experience and is the cofounder and chief investment officer of
10-15 Associates. She co-founded the
registered investment advisory firm 25
years ago.
At 10-15 Associates, we specialize in
managing and protecting retirement
savings and portfolios. Over the 25
years, our clients have referred their
family and friends and our firm has
grown. Today our staff serves more than
1,200 clients and manages over half a
billion in client’s assets.
Headquartered in the Hudson Valley
village of Goshen, New York, we help
our clients make successful transitions
from saving for retirement to living in
retirement.
For More Information:
Please call (800) 225-1015
Or visit us at:
www.1015associates.com
10-15 Associates
168 Main Street
Goshen, NY 10924
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