PMC Weekly Review - February 13, 2015
For the first time in many months, and certainly since the beginning of the year, extreme volatility in the financial markets was not as evident. The sharp intra-day swings that marked so many days in January did not make an appearance. Energy prices, having plummeted and then rallied, simply dithered. And while there was a modest rise in U.S. Treasury yields once again above 2.0%, in general, fixed income markets were no more frenetic.
It’s not as if the macro economic and political backdrop became any calmer. In fact, tension over the future of Greece and its place in the Eurozone only increased in the absence of any deal between the new radical Greek government and its many European sovereign creditors, German most of all. While the whisper in both the media and markets was that there would be some deal to alter the terms of further credit extended to the Greek government, such an outcome is by no means certain, especially with each side seemingly committed to a stance that the other appears to reject unequivocally. This may be posturing, but it would be unwise to assume that it is just that. However, it would also be unwise to assume that the world today is as close to a financial precipice as it was in November of 2011 when Greece and a “Grexit” from the Eurozone were upending markets. Greece and its $300 billion plus in debt appears to be occupying a more realistic place in the economic firmament – important, yes, but epically important, perhaps not.
Tension over Russia and the Ukraine also flared, but that too subsided with the appearance of a deal that might at least contain what has become a messy undeclared war in eastern Ukraine. Markets were notably calm in the face of this issue as well, suggesting that some balance has indeed returned to markets that have been anything but, at least for the moment.
And global economic data continues to send mixed to positive signals, with U.S. job creation strong but consumer spending and a number of indicators weaker; with China economic data on trade soft; and Eurozone numbers that are at best shy of mediocre. Earnings for the fourth quarter of 2014 reported by U.S. companies over the past few weeks showed that three-quarters of companies actually beat estimates (according to FactSet). It is actually the best quarter in terms of beating expectations since 2010, but the actual numbers were quite modest, with 3% earnings growth overall. That did mask huge variations, with healthcare showing 21% growth, while energy companies posted a blended average of -21% in decline! Blended revenue growth was only 1.6%.
Meanwhile, U.S. stocks are now modestly positive for the year (the S&P 500 is up just shy of 1.5% as of February 12), while global equities are for the first time in a long while outperforming considerably. The lack of panic in the face of volatility and the modest start should be seen as quite positive signs. Equities aren’t galloping too far ahead, and fear seems as much in check as euphoria. That equilibrium rarely lasts, so we should use it well to position and tweak.
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