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Wall Street to Your Street


April Recap: Times a-Changin', Oil Flows While Technology Slows

"The slow one now will later be fast ... and the first one now will later be last." Bob Dylan's famous refrain is an apt description of the April stock market, which was led by the four weakest sectors of the past year: energy, financials, materials and health care.

On the flip side, utilities, which had been the best-performing sector through the first quarter of 2016, was one of the three worst-performing sectors in April, along with telecommunications and information technology.

Also trailing the market were some of the leading technology stocks, which had paced the market last year.

We believe much of the movement in those sectors can be attributed to sector rotation, with investors easing out of growth stocks and into value stocks. But overall, most of the movement in the S&P 500® Index was sideways throughout most of April, although the market managed to eke out a slight gain (0.3%) for the month.

A weak first-quarter gross domestic product (GDP) report issued by the U.S. Commerce Department on April 28 precipitated a slight drop in stocks during the final day of the month. The GDP report, which is the broadest measure of economic output, revealed that GDP had grown at a seasonally adjusted annual rate of only 0.5% through the first quarter of 2016. That was the lowest GDP growth level in the past two years.

In a nutshell

(Exhibit 1)



April fly-over: FANG phenomenon fading?

Notable stocks of 2015 included an exclusive quartet of technology titans known to the investment community by the acronym "FANG" – Facebook, Amazon, Netflix and Google.

But this year, FANG stocks, as well as some other notable technology mainstays, have struggled – with several dropping by double-digits. While we believe normal sector rotation has played a part in the price decline, several technology leaders, such as Apple, Microsoft, Expedia and LinkedIn, have fanned the flames in recent weeks with disappointing financial reports. Here's how the year has shaken out so far for some of the leading tech companies:

Facebook (FB)

Although the social networking site's financial fundamentals and earnings growth remain solid, the growth of the stock has slowed this year. The stock ended 2015 at $104.66, moved up to $114.10 on March 31 to close the quarter, but dipped to less than $110 during April before finishing the month strong and moving into positive territory for both the month and the year at $117.58 a share.

Amazon (AMZN)

The online retailer was down for the year and the month until releasing a very positive earnings report after the market's close on April 28. Shares jumped nearly 10% over the next 24 hours, after the new report revealed profit and earnings figures well in excess of analysts' estimates. The stock closed 2015 at $675.89, dipped 12% to $593.64 at the close of the first quarter (March 31), and rebounded to $659.59 to close April up 11% for the month, but still down 2% for the year.

Netflix (NFLX)

The online movie and programming behemoth dropped about $16 in the final two weeks of April after the company issued a first-quarter earnings report that fell below analysts' expectations. Netflix closed 2015 at $114.38, dropped 11% the first quarter to close on March 31 at $102.23, and dipped an additional 12% in April to close the month at $90.03. That's a loss of 21% for the year.

Google (GOOGL)

Now known as Alphabet, shares were down only slightly through the first quarter, but experienced a fairly steep drop in April, despite solid financial performance. The stock ended 2015 at $778.01, dipped to $762.95 to end the first quarter, then dropped 7% in April, closing the month at $707.88 – a 9% loss for the year.

LinkedIn (LNKD)

Beyond FANG, one of the biggest losers in the technology space is LinkedIn. The professional networking site dropped 40% Feb. 5 after the company announced that it expected second-quarter earnings to be well below previous projections. After closing 2015 at $225.08, LinkedIn dropped to a low for the year of $100.12 on Feb. 9. It has since recovered some of the lost ground, closing April 29 at $125.24, but is still down 44% for the year.

Expedia (EXPE)

The world's largest online travel service is also down this year after a very strong 2015.  It closed the year at $124.30, but steadily tanked to a low of $91.53 on Feb. 8 before rebounding through March and April. The rebound was capped by a 9% gain on April 29, a day after the firm issued a strong quarterly earnings report. After ending the month at $115.77, the stock was down about 7% for the year.

Microsoft (MSFT)

The software giant is down slightly for both the year and the month. It closed 2015 at $55.48 and finished the first quarter of 2016 at almost the same price, $55.22. But the stock dropped 10% after the company released a quarterly earnings report on April 21 that fell slightly below analysts' projections, closing the month at $49.87.

Apple (AAPL)

The company reported its first decline in revenue in 13 years on April 26. It closed out the final three days of the month with a 10% decline, ending the month at $93.74, down 11% for the year.

Other economic highlights from the month

Employment numbers still solid

Employment has been one of the bright spots of the economy in recent months, and the April Employment Report from the U.S. Department of Labor brought more good news. According to the April report, nonfarm payrolls were up 215,000 in March following a gain of 245,000 in February.

But the number of new jobs fell short of the number of new individuals now looking for work. The labor force grew by 396,000, according to the report, which was considerably higher than the number of new jobs filled. The estimated number of new jobs for the first quarter of 2016 was 628,000, which is slightly above the quarterly average of about 610,000 per quarter since the job market began to recover in 2011.

We believe the increase in the number of new jobs and the trend of more people entering the work force is a good sign for the economy; however, there remains substantial room for improvement in labor conditions.

Federal Reserve makes no moves

The Fed again left interest rates unchanged. Based on indications from the Fed, we expect no more than two rate hikes through the remainder of this year.

Dollar continues to drop

The dollar continued to drop versus the euro and the yen, which is good news for U.S. exporters. But we wonder how much longer this trend will continue.

Oil rebound

Oil prices continued to increase into the mid-$40s per barrel by the end of April, prompting a rebound in energy stocks.

China does better

After months of concern over weakness in the Chinese economy, China issued a new economic report on April 15 that indicated the economy was stabilizing with a GDP growth rate of about 6.5% – which we consider a reasonable growth rate for China.

By the numbers

S&P 500 continues to edge up

Exhibit 2As the graph illustrates, the S&P 500 is up 0.3% for the month and 1.0% for the year (Exhibit 2).

The best performing sectors in the S&P 500 Index for the month of April were energy, up about 9%, and materials, up 5%, and health care and financials, both up about 3%. Industrials were up 1% for the month.

The worst performing sectors were information technology, down about 5%, telecommunications down 3% and utilities down about 2%. Consumer staples finished the month down 1%.

Consumer discretionary sector was even for the month.

Equity earnings projections flattening out

Exhibit 3According to Standard & Poor's, forward aggregate earnings for S&P 500 companies has been dropping slowly this year, from about $127 at the start of the year to $124.36 at the end of April (Exhibit 3). We believe that the $124.36 projection is still somewhat optimistic, and that the real earnings numbers will be slightly lower.

Forward price-earnings ratios

The forward 12-month price-earnings (P/E) ratio for the S&P 500 ended April at 16.75, up slightly from the 16.4 level at the first Exhibit 4of the month. It is also up from the 16.1 P/E ratio at the start of 2016 (Exhibit 4).

While the 16.75 P/E level is still within a reasonable range based on historic levels, we consider it to be fairly high considering the slowing growth rate of corporate earnings.

Equity earnings yield

Exhibit 5The forward 12-months earnings yield for the S&P 500 barely moved during April, beginning the month at about 6% and ending the month at the same level, according to Standard & Poor's (Exhibit 5). Although the equity earnings yield is still well above the yield on 10-year U.S. Treasuries (which is about 1.9%), it has declined steadily since 2011 when the yield reached as high as 7.4%.

Bond market: Fed holds the line on rates

Exhibit 6The market for U.S. 10-year Treasury bonds was fairly calm in April, with market yields ranging between 1.70% and 1.95%, finishing the month at 1.82% (Exhibit 6).

The Federal Reserve did not act on a rate change during its April 27 meeting, so the Fed interest rate remains unchanged.

The U.S. bond market has fallen into the range of negative "real" interest rates this year, as market rates paid on 10-year U.S. Treasuries have been less than 2% since Jan. 27. That is below the 2.2% rate of inflation in the U.S. through the first quarter of 2016.1 The "negative real interest rate" is defined as a bond or debt instrument yield below the current rate of inflation.

But overseas, central banks have issued a wave of government bonds with true "negative interest rates" that yield less than 0%. (Negative interest rates refer to a monetary policy in which bank deposits and government bonds actually return less than the investor deposits.) In all, about $7 trillion in government bonds now carry "negative interest rates." The leading issuers of negative rate bonds are Germany, Japan and Switzerland.

This extreme policy pursued by the central banks in Europe and Japan is intended to stimulate economic growth, but in our view, it has shown little evidence of success to date.

Not only is it hurting the banking industry – since banks are unable to make money on deposits because they receive a negative yield on the government bonds they buy – it has also had the effect of slowing down consumer spending. With negative interest rates, consumers now believe they need to stash even more cash to compensate for the negative rates. They are saving more now instead of spending.

Dollar continues descent

Exhibit 7The U.S. dollar continued its gradual decline versus many of the world's other leading currencies during April.

As the graph shows, the dollar declined versus the yen through the first four months of 2016, while the graph on the right shows the euro also gaining ground on the dollar through the first four months of the year after a prolonged period of losing ground to the dollar over the past two years (Exhibit 7).

If the dollar continues to decline versus the world’s other leading currencies, it would be a boon to U.S. manufacturers who could market their products more competitively overseas.

However, because of the economic weakness in both Europe and Japan, we are skeptical that the recent downward trend in the value of the dollar will be sustainable over an extended period.

Oil & gold keep moving up

Exhibit 8As the graph illustrates, oil prices have continued to trend upward from their recent low of under $27 a barrel on Feb. 11 (Exhibit 8). After starting the month at about $37 a barrel, prices moved to more than $40 a barrel in early April and finished the month at around $45.92 a barrel.

We believe the strength in the oil market is due to supply moving in line with demand after many months of overproduction. Production has slowed as prices dropped, with the higher-cost producers forced to curtail production. We believe that supply and demand will likely be in balance by the end of this year.

While we expect the price of oil to continue rising, we do not expect it to go back up to $100 a barrel anytime soon. With shale producers and other suppliers waiting to jump back into the market at the right price, we expect that the lid on oil prices will be at about $70 to $80 a barrel over the next couple of years.

As the graph illustrates, gold continued to trend upward in April, continuing a pattern that has characterized the entire year so far (Exhibit 8). After ending 2015 at $1,020 an ounce, the price of gold ended the first quarter at $1,222, and continued to trend up to $1,295.40 by the end of April.

Global market

Exhibit 9As the graph illustrates, the global equities market (as measured by the EAFE Index) made a modest gain for the month, moving from 940.1 at the close of trading March 31 to 960.3 at the end of April (Exhibit 9).

While economies throughout Europe remain sluggish, China reported that its economy is stabilizing in its first-quarter GDP report in April, with GDP growing at an estimated annualized rate of 6.5%.

The emerging markets also showed some positive movement, which we believe is due, in part, to an improvement in commodities prices.

Fast-forward: Outlook for the markets

Slow going

Although 2016 has gotten off to a fairly positive start, there are headwinds that could impede stock market growth – and a few tailwinds that may work in the market's favor:


The U.S. economy continues to face some formidable headwinds, including declining corporate earnings and slowing GDP growth, a slow recovery in the energy industry, an elevated dollar, slowing consumer spending, a drop in manufacturing, soft retail sales, and weakening earnings in the technology sector.
Add to that the sluggish global economy and unprecedented level of "negative interest rate" bonds issued by governments in Europe and Japan, and we believe there is sufficient evidence to suggest the likelihood of a sluggish stock market over the next few months.


On the bright side, employment levels have remained strong; U.S. manufacturers can take solace in a slight drop in the value of the dollar this year versus the yen and the euro; and oil prices have continued to move up. On the global front, economic news out of China has been encouraging. If China's economy rebounds, it could be a major boost to the global economy. We have also seen some positive movement in some of the emerging markets.
One last factor that may keep investors interested in stocks is the lack of a suitable alternative. With government bonds yielding less than 2% in the U.S. and negative rates in Europe and Japan, investors may still be tilted toward equities even at the higher valuations.

Our economic expectations

We continue to believe that the GDP growth rate will be lower this year than it has been the past few years. The consensus among analysts for GDP growth for this year is 2.1%, according to the Blue Chip Economic Indicators, but we project GDP growth at 1.5% to 2.0%.

Globally, over the next 12 months, we continue to believe that China will have GDP growth of about 6.5%, Japan will have negative growth, Europe will experience growth of just less than 2%, and the United Kingdom will post GDP growth of 3% or more.

The economic slow-down suggests the risk of recession is not insignificant. But, we also believe a recession can be avoided, particularly if China continues to rebound, rising oil prices continue to recharge the energy sector and employment remains strong.

Either way, to steal a line from another notable Minnesota musician, "I know, I know times are changing ... purple rain, purple rain."

Contributing to this report: Russell Swansen, Chief Investment Officer; David Francis, CFA, Head of Equity; Mark Simenstad, CFA, Head of Fixed Income; John Groton, Jr., CFA, Director of Equity Research; Darren Bagwell, Sr. Equity Portfolio Manager; and Jeff Branstad, CFA, Senior Investment Product Strategist

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