Capital Notes
Capital Notes
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Capital Notes, the mid-monthly companion piece to our flagship publication, Capital Perspectives, provides a round-up of market and economic analysis.



Capital Notes: May 18, 2015

Capital Notes: April 17, 2015

Capital Notes: March 16, 2015



Previous investment publication: Market Briefs

March 13, 2015
  • Second verse, same as the first. This year's economy is starting to resemble last year's. GDP growth turned negative in 1Q of 2014 before rebounding. While growth is not likely to be on the negative side this year, the evidence is pointing toward a first quarter "soft patch" closer to 2%. The latest evidence for a sloppy 1Q came this week from February's disappointing retail sales report, with sales down -0.6%. Like last year, weather was a big culprit but this year's poor results likely also reflected distortions from the recent West Coast dock workers' strike. The poor results were also probably affected by volatility and uncertainty around oil prices, the U.S. dollar, and interest rates.
  • Fundamentals still strong even with the likely softer results showing up in 1Q. The employment situation didn't show much weakness; the National Federation of Independent Businesses survey showed an uptick in optimism, from 97.9 to 98.0. Given this, we expect lost growth from factors mentioned above to result in an outsized gain in 2Q, but we maintain our overall outlook for U.S. growth to approximate 3%.
  • European Central Bank begins bond buying and the U.S. dollar moved up once again, reaching a new cycle exchange rate extreme of 1.06 vs. the euro. The interplay between the U.S. dollar and foreign stock markets has been dramatic. In euro terms, many European stock markets are up between 15%-20% so far this year. However, when euro depreciation is factored in, these gains shrivel with the Euro Stoxx 50 Index up only 1.5% (in U.S. dollars). The eurozone is showing signs of improvement but problems remain: Despite the recent 4-month extension of terms, Greece and its banks are lacking fresh sources of liquidity which could lead to a major default and euro exit.
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Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 6, 2015
  • March opened in typical lion fashion. After a flurry of excitement to end February as the S&P 500 banged out a new high, the index has settled back slightly to trade around 2,100 as returns over the past 5 days moved a bit into the red, down less than 0.5%. After a miserable February, fixed income markets also retreated a bit although interest rates remain near or just below where they started the year. On the bright side, the strong showing of stocks last month, when combined with the slightly negative fixed income market performance, allowed our positioning in favor of stocks to perform very well.
  • Jobs report not so chilly. Fears of weather-impaired job growth proved unfounded as payrolls surprised with a gain of 295,000 vs. expectations closer to 235,000. The unemployment rate dropped to 5.5%. Wage growth turned a bit softer up 0.1% on average hourly earnings. All told, data reconfirmed the strong employment trends which will ultimately support economic growth, including consumer spending and business investment.
  • With the jobs report, February's data cycle is under way. There are 2 reasons we'll be watching closely: first, as we noted a few weeks ago when discussing the Citi economic surprise indicator, economic data have been mixed. As we move through the next round of releases, the margin of error between positive and negative data has narrowed, so we will need more conclusive evidence that the recovery is still growing at our expected 3% clip. And second, the data-dependent Federal Reserve will likely make the decision on when to begin raising interest rates on a meeting-by-meeting basis, which will place an added burden on deciphering data releases to assess timing.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 27, 2015
  • Chair Janet Yellen said the Fed can be patient in normalizing rates, since inflation continues to be well below the central bank's target and labor improvements are moderate. On the news, the U.S. 10-year Treasury fell over 15 basis points (bps) from 2.13% before settling at around the 2.0% level. Markets have been skittish for a while now about the prospect of rates rising before the economy can handle it, but were reassured by Yellen's indications the Fed will be especially sensitive to the fragility of the recovery. Her comments reinforce our view of a strengthening economy and a preference for stocks over bonds.
  • U.S. and international stocks up last week (with the S&P 500 and MSCI EAFE indexes up just under 1% and over 1.5%, respectively). Expectations of stimulus in much of the developed world, along with the break in tensions for both Greece and Ukraine, have allowed for some risk taking by investors to gain a foothold. This, plus the Fed's dovish comments, helped boost bond returns by 50 bps for the trailing 5 days, giving most portfolios positive returns year to date. While non-U.S. stocks have started the year relatively strong, we still think international uncertainty and the strengthening U.S. economy support our U.S. stock overweight.
  • Economic releases this past week were mostly in line with market expectations. New home sales were slightly better than economists had expected. Durable orders were up 2.8%, signaling reasonable consumer demand for bigger ticket items. Again, this supports our U.S. overweight and underweight to inflation hedges.
Note: Please look for the inaugural issue of our new monthly publication, Capital Perspectives, to be published on Monday, March 2. We look forward to providing you with robust thought leadership and guidance on how it could impact your portfolio.

Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 20, 2015
  • The Investment Strategy Team met this week and made no changes to our portfolio strategy weights. We remain comfortable with our positions—stocks over bonds, U.S. stocks over international, and growth over value—and, so far this month, these positions have added to performance. Over the past 5 trading days, stock markets moved forward, with the S&P 500 adding 1.4% and the S&P 500, Russell 3000, DAX (Germany), FTSE 100 (U.K.), and Nikkei (Japan) all reaching 3-year highs. And speaking of highs…
  • NASDAQ nears all-time high. At the height of the dot-com bubble in March 2000, the tech-heavy NASDAQ reached a high of 5132.5. And now, with a close at 4925, the only major U.S. index that has yet to topple its all-time high is looking to bring that to an end. Of course this has been a very severe roundtrip as the market bottomed in 2002, 2 ½ years after setting its high water mark, at 1108, a decline of more than 78%.
  • U.S. economic data not as strong as economist expectations, as measured by economic surprise indexes, which recently showed the U.S. had reached a value of -48, the lowest level since 2012. This means that, while data have not pointed toward contraction, they have not been as strong as economists might have expected. As we saw earlier this year, markets were quite volatile due to the uncertainty created by dynamics involving lower oil prices, a stronger dollar, and low interest rates. As we look at the data, these influences are showing up to some degree. Some aspects of this should fade but the strong dollar remains in play and will continue to have a negative influence on areas such as exports.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 13, 2015
  • Lower pump price doesn't lift spending elsewhere. Lower oil and gas prices should be a net positive for the U.S. economy, but the benefits have yet to appear; retail sales released this week show a slump, driven by depressed gas prices. Even if gas is excluded, consumers haven't spent their "energy refund," with the last two months showing flat to slightly declining sales. Add to this lower energy business investment, since fewer projects make sense at the current $52 a barrel. We still believe the U.S. economy provides more attractive investments than that of other developed nations.
  • Fingers crossed on Ukrainian ceasefire. Ukraine's finances have been maxed out and the government needs to work out financing from the International Monetary Fund. Russia's troubles persist, as currency and oil prices have severely impacted its economy, and the European Union has struggled from harsh sanctions. Since the ceasefire was announced on Thursday, EU stock and bond prices have been favorable, but our expectations are that Europe has further issues to resolve before it attracts more financial investments.
  • Still-weak European financial landscape. Resolution of the Greek bailout eluded eurozone finance ministers at this week's meeting. The existing agreement expires at the end of February and the lack of liquidity within the Greek banking system and the budget shortfalls don't allow for an orderly resolution if a new deal can't be forged. Elsewhere, Sweden lowered its interest rates and announced a round of bond-buying, and even the Bank of England signaled it could do the same in the face of continued low inflation. Fear of slow inflation has continued to weigh on Europe, leading us to continue our overweight to U.S. stocks; and further quantitative easing potential supports our lack of exposure to non-U.S. dollar-denominated bonds.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 6, 2015
  • U.S. jobs figures up, despite unemployment inching up 0.1% from 5.6% to 5.7%. Also up: labor force participation, hourly wages, and new jobs—and the prior month revision to over 320,000 new jobs shows a workforce pushing forward. Hourly earnings were up more than any month since November 2008 and the revised jobs created in December make 4Q of 2014 the best since the three months ending November 1997. Jobs strength attracted workers to the market, which accounts for the unemployment uptick and is a good sign for a recovering economy.
  • Oil prices stabilized to a favorable extent, climbing to $51 per barrel from $44 at the end of January. There are still a number of unknowns whose effects on energy prices have yet to be felt, such as OPEC, U.S. fracking production, global supply and demand imbalances, and how oil revenue will impact a number of struggling economies.
  • 10-year U.S. Treasury rates rise in light of positive economic data, moving from 1.64% on February 1 to 1.87% on February 6. We're also seeing markets beginning to shorten their expectations to September for the Fed's rates movements. The Fed no doubt sees this as positive and hopes market expectation and their view continue to come closer together.
  • Uncertainty in Europe is ongoing. Ukrainian talks have stalled and the specter of U.S. military aid has potentially increased tensions while the education of the newly elected Greek government by the European finance community played out last week. The ECB announcement to let the Greek central bank help with bank liquidity was a positive turn, while reinforcing the impact the ECB and the European Commission have on the Greek banking and monetary situation.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 30, 2015
  • A change in our investment positioning. Our Investment Strategy Team has agreed to shift about 2% from cash to high-yield municipal bonds in the High Net Worth Portfolios. Even in the likely case of rising interest rates, we expect high-yield munis should provide positive tax-equivalent returns well ahead of cash returns. Given recent and ongoing improvements in state and local finances, we believe the credit risks are very manageable.
  • U.S. stocks jumpy so far this year, with frequent daily moves of over 1%—largely due, we feel, to the U.S. dollar rise and oil price dip that have wreaked havoc with earnings expectations, employment gains, and economic growth. Stability in oil and currency markets could help but it may take a few months to absorb all of the implications from these dramatic price changes.
  • The Fed decides not to decide—yet. This week, the Fed signaled it would wait until at least June before raising short-term interest rates, but it wouldn't be more definitive. The data-driven central bank's overall positive view of the economy was offset by its acknowledgment that the slow pace of inflation will likely slow further before picking up. Hints of rate hikes in time for summer may not come to pass until the fall. The wait-and-see game continues.
  • Will a Seattle Super Bowl win mean a bull market? So goes a theory of stock market performance, which holds that if the winner were a (pre- or post-NFL merger) NFC team like the Seahawks,¹ stocks would be up that year—or down, in the case of an AFC winner. As of 2009, the theory was correct for 43 years (81%).² Still, it's a random correlation, not a scientific causality. The NFC Giants won in 2008—and we all remember what happened to stocks that year!
¹ The Seahawks were born in the AFC but have come of age as an NFC franchise, a status that last year's equity performance confirmed.

² "Wall Street bulls should hate the J-E-T-S," by Chris Isidore, CNN Money, 1/22/2010.

Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 23, 2015
  • European Central Bank (ECB) to begin its bond-buying program, with monthly purchases of €60 billion, comprising mostly sovereign and eurozone agency debt—and stock markets responded favorably. The region's bond yields declined and inflation expectations increased—positive moves, we feel, since absent the write-off of debt, the EU needs inflation and GDP growth to exceed the cost of debt. We find the systemic economic reforms needed to rejuvenate Europe are incomplete, however, and remain cautious in our EU stock exposures and absent EU debt exposure.
  • A Greek chorus of pleas for debt relief. Austerity imposed on Greece by the International Monetary Fund, ECB, and European Commission has devastated its economy. Sunday's elections will see how far left the people and government are willing to go, which will impact Greece's debt deals and potentially its EU membership. Even a win by the anti-euro Syriza party likely won't suffice without help from coalition partners, so we don't look for the election results to provide immediate clarity around the situation.
  • International stocks outpacing U.S. so far this year. With Thursday's rally, the S&P 500 index was up 29 basis points (0.29%) in 2015, while the MSCI EAFE index was up about the same. The dollar's strength has muted the local currency returns which have been quite good.
  • U.S. interest rates have continued to fall, providing a positive return (Barclays' Aggregate Bond index is up over 1%) so far in 2015. Falling rates concern the Fed, which has signaled its intention to raise rates this year. The ECB's bond-buying program may help the Fed by looking to align bond prices, interest rates, and yield curves with the Fed's intentions. Short-term rates inched up and long-term rates dipped after the ECB announcement; if this continues, it should help position the curve consistent with Fed actions anticipated later in 2015.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 16, 2015
  • Bonds provided a haven as yields fell dramatically, compared to the S&P 500 index which recorded a 3.3% decline over the past 5 trading days. Since the year started, 10-year Treasury yields have fallen 45 basis points (bps) but the more telling shift may be from the Fed-sensitive 2-year Treasury note which has chopped off 24 bps (0.24%) of yield. Looking over one-month Fed fund futures contracts, a Fed rate hike is not fully priced in until January 2016.
  • What happens in the U.S. stays in the U.S.—at least this week. The Euro Stoxx 50 Index was down just 0.7% and Japan's Nikkei was up 3.7%. It's only one week, but we wonder if the down S&P reflects concerns about pending higher rates while better performance overseas may reflect the asset price benefits of central bank quantitative easing, which may begin with a January 22 initiation of bond purchases.
  • SOS for EUR? The Swiss National Bank removed its pricey cap on the euro (EUR), the immediate effect of which was to dramatically increase the value of the Swiss franc, up 17% vs. the U.S. dollar (USD), which had been pushed to artificially low levels while maintaining the cap against the EUR. Why remove the cap now? Speculation ranges from concern about further EUR deterioration once QE begins to potential problems around the rising USD.
  • U.S. retail sales dip surprises. Negative expectations were met for December's overall retail sales data (-0.9%), unlike expectations for a positive figure once auto and gas sales were removed. End result was a 0.3% decline, which ushered markets downward. This year's start has challenged our pro-U.S. stock positioning, but we feel it's still supported by fundamentals and believe it will be validated once the dust settles on oil prices, central bank actions, interest rates, and earnings releases.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 9, 2015
  • 2015 has a bumpy start, with U.S. 10-year Treasury rates falling to 2% and 3 trading days with more than a 1% move in the S&P 500. Unfortunately, everything that happens outside the U.S. doesn't necessarily stay outside the U.S., so actions by global central banks to boost liquidity may result in greater market volatility here at home. We still expect stocks to outperform bonds over the intermediate term, but there will be times when our forecast will be tested.
  • Short-term rates out of step with expected Fed actions, especially on the short end of the yield curve. Global uncertainty, volatility, and U.S. dollar strength has resulted in a flight to the relative safety of the U.S. and near-term fixed income maturities, pushing down 2-year Treasury rates to below 60 basis points (0.60%). A move to raise rates would leave those investors with paper losses. We prefer to not be too short on our duration and wait for markets to ease or the Fed to start its tightening.
  • Another worrisome year for Europe. The ECB is considering buying high-quality investment-grade bonds in the €500 billion vicinity, a disappointing figure as it would only take the central bank's balance sheet about halfway to its goal. In the wake of a year of consumer price deflation, uncertainty about both the Greek election outcome and potential effects of ECB bond-buying has left investors insecure. We expect these circumstances to negatively weigh on international stock prices, as compared to the U.S.
  • Jobs report reinforces the improving labor market. Although 2014 job growth was the highest since 1999, there is still labor slack. The lower unemployment rate (5.6%) was driven by lower participation while average wages declined. All this should give the Fed ample breathing room before it considers raising rates.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]






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