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Weekly Insights

Week of March 30th, 2015

Weekly Market Recap
Start the week off right with this one-page snapshot of headlines and market performance.
Weekly Market Podcast
Start every week by listening to our market strategists' commentary.
Updated as of: 03/30/15
Weekly Economic Update
Stay current on the economic landscape and note changes from week-to-week.  
Updated
The final estimate of 4Q 2014 real GDP put growth at 2.2% q/q saar, unrevised from the second estimate. Private consumption expenditures, which increased at the strongest pace since 1Q 2006, were revised higher, and exports were also stronger than previously thought despite the strength of the dollar. Less government spending and higher imports, which is a subtraction from the GDP calculations, offset upward revisions. The increase in inventory was also revised lower again, but that means that inventories should be less of a drag on 1Q 2015 growth. On balance, the U.S. economy continues to grow at an above-trend rate.
The Febuary employment report showed broad-based improvement in the labor market. Nonfarm payrolls rose by 295,000, and the unemployment rate fell by 0.2% percentage points to 5.5%. Measures of labor market health unaccounted for in the overall unemployment rate, such as the involuntary part-time work and the long-term unemployment rates also improved. Wage growth, on the other hand, was disappointing in this report, increasing $0.03 overall and remaining flat in the more reliable production & nonsupervisory workers series.
S&P 500 operating earnings are estimated to be $26.67 for the fourth quarter, representing year-over-year growth of -5.6%. Lower earnings were mainly due to low oil prices, a strong dollar, and pension write-offs.
Headline consumer prices rose 0.2% between January and February, and are now down 0.1% yoy, while core CPI inflation firmed slightly to 1.7% yoy. Headline inflation was stronger largely due to increases in very low energy and gasoline prices. Final demand producer inflation was down further in Febuary (-0.7% yoy), with weakness coming from a previous 10.3% drop in energy prices. Additionally, import prices decreased 2.5% month-over-month driven by falling energy prices and a stronger dollar, further illustrating deflationary pressures.
There were no policy changes in the FOMC's March statement, but it opened the door for a rate increase this year by removing the word "patient". The Fed stressed a rate increase would only come after further improvement in the labor market and when the Committee had "reasonable confidence" inflation would hit 2 percent in the medium term. The Fed lowered its forecasts for both the long-run unemployment rate and near-term economic growth, signalling the Fed sees more slack in the economy than previously thought.
  • Volatility caused by the timing and communication of Fed tightening.
  • Political risk potentially caused by Middle East turmoil and lower oil prices.
  • Deflation worries in other developed economies outside of the U.S.
  • Volatility caused by sharp swings in commodity prices and exchange rates.
  • A slow upward trend in earnings (despite special factors depressing 4Q 2014 numbers), coupled with low interest rates, still make stocks look attractive in relative terms.
  • Cyclical and small cap stocks are generally favored in a rising interest rate environment.
  • High yield bonds look more attractive than Treasuries, but a diversified approach to fixed income investing seems appropriate given likely Fed tightening in 2015.
  • Despite disappointing returns due to a stronger dollar in 2014, international exposure is still warranted given growth prospects abroad.

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