Good afternoon on an incredibly beautiful day here in Seattle. For those of you not already on the golf course or strolling around Green Lake, here is our weekly update on the markets. Stocks fell globally at the end of April following central bank hawkish signals, mixed corporate earnings results, and varied economic growth data. The S&P 500 sold off for the week, closing down -1.2%, but still finishing the month up 0.4% - its first back-to-back monthly increase since November. A steep decline set in midday Thursday and the downturn continued on Friday, all after a relatively flat first half of the week.
After approximately two-thirds of US companies have reported their Q1 earnings thus far, the results are similar to historical averages. As the chart here shows, 46% of companies have beaten earnings estimates while 10% have missed estimates. The market is expected to be focused on this Friday’s earnings announcements during which many energy companies will release results for the first quarter of the year - a period that included a 15-year low in oil prices.
Simultaneous to these earnings announcements, we received first estimates on GDP growth, which indicated that US GDP expanded by 0.5% in Q1, marginally below consensus expectations (0.7%), and its slowest pace in two years. On the flip side, Euro area GDP growth surprised to the upside for Q1, coming in at +0.6%, versus consensus of +0.4%.
Bond prices ended the week higher as the equity markets chewed through many mixed earnings reports. US 10-yr Treasury yields fell to weekly lows following the FOMC meeting that ended Wednesday, before subsequently rising to previous levels at 1.8%. In their Wednesday statement, Federal Reserve officials left the interest rates unchanged. The benchmark federal-funds rate will continue to be held between 0.25% and 0.50%. Cited by the statement were continued concerns regarding low domestic inflation, slowing overseas economic growth, and the uncertainty related to the British potential exit from the European Union. Labor market conditions were referenced as a strength. They will again meet in June, making this the soonest we may see a rate increase. However, the market-implied probabilities of a June hike – which signal no change in rates – have remained relatively stable.
Additionally, the Bank of Japan left policy rates unchanged and pushed aside measures for additional stimulus in order to better understand the impact of the negative-rate policy implemented in February. This decision prompted 10-Year Japanese bond yields to rise to -0.8%, as markets expected further stimulus from the BoJ.
Oil reached its highest level of the year after a government report showed that US crude production fell to an 18-month low. West Texas Intermediate ended the week up at $46.02. Oil has rebounded in the past few months after tumbling in February to the lowest level since 2003.
Six of the ten economic sectors had negative performance for the week. The utilities sector was the best performing sector with a 2.28% return. The telecommunication services and consumer staples sectors followed with 1.14% and 0.75% returns, respectively. The information technology sector’s -3.57% return was the worst performance of all the sectors. This was due in large part to Apple’s quarterly report in which they missed earnings estimates, as well as the news that activist investor Carl Icahn was removing his substantial stake in the company over concerns of the company’s ability to expand in China due to their government’s policies. Tech was followed in the negative by health care and financials, which returned -2.95% and -1.24%, respectively.
[Chart Source: Goldman Sachs Global Investment Research and GSAM as of 4/28/2016. Market and Economic Summary Source: Bloomberg and GSAM. Key Economic Releases Source: Goldman Sachs Global Investment Research, Bloomberg, and GSAM. Past performance does not guarantee future results, which may vary.]