A recent macroeconomic trend will make it difficult for the US equity market to continue to advance in April. This trend has been the surge in the value of the US dollar versus most other currencies, but especially the Euro, over the last several months. Equities appreciate in value based over the long term based on increases in earnings, and an appreciating US dollar reduces the foreign earnings of US corporations in dollar terms.
The above chart illustrates just how rapidly the value of the US dollar has increased relative to the Euro. A low of $ .72 was reached on May 5, 2014, with a high of $.96 attained on March 13th, for a 33.33% increase in value in just ten months. Much of the increase in the value of the dollar has occurred in the last 120 days. The rapidity and size of this increase makes it difficult for US corporations to make adjustments in their operations in the short term to hedge or mitigate the currency effect, and will make it make it increasing difficult for US corporations competing in foreign markets against European Union (“EU”) competitors to increase earnings, especially if production costs are primarily incurred in US dollars.
Other factors contributing to the rainy forecast for US equities in April includes the continuing stare down between Greek politicians and other EU bureaucrats (key dates April 9th and 20th), the seasonal dampening effect during the first calendar quarter from high deductible healthcare plans, promulgated by ObamaCare, the ongoing equity market skittishness regarding the possibility of the Federal Reserve increasing interest rates prematurely, and the even more geopolitical instability (i.e. – Yemen and Nigeria). Add the possibility of a country with a resource-based economy, defaulting on its debt (Venezuela, Nigeria, Angola, and Argentina) come to mind, and April could develop into a monsoon for US investors.
Historically lower prices for a wide range of commodities including oil, gas, copper, iron ore, silver, platinum, palladium, and lumber should create future buying opportunities in the energy and materials sectors. The energy and materials sectors will likely present upcoming opportunities to hunt for bargains after quarterly earnings are released. Stay with well-capitalized firms that can outlast a prolonged slump in commodity prices, should that occur.
Buying opportunities are also present worldwide as many foreign equity securities are cheaper in US dollars due to the currency exchange rate fluctuation. We have seen some bargains in Europe specifically, and additional opportunities should appear.
We do not foresee, as many have predicted, significant interest rate increases for US debt during the current year due to continuing economic weakness in the US, and the stagnation across the Europe. Such a move by the Federal Reserve would undermine EU monetary policy aimed at stimulating economic growth through devaluating the Euro currency, and would put upward pressure on interest rates worldwide, something the worldwide economy could ill afford.
Ditto for Japan!
That leads us to the GDP growth rate for the first calendar quarter of 2015. Recent data indicates that many US consumers are not yet spending the savings from lower prices for transportation and heating fuels. Many of the economic indicators we monitor monthly have exhibited softness over the last several months. During the current expansion, the best sector for job growth for the US economy has often been energy sector employment and that is expected to begin to decline for calendar Q1. Energy is an industry with a “high multiplier” and the macroeconomic effect of decreasing investment in new oil and gas wells will have a tangible impact on economic growth. As a result of these factors, our forecast is for tepid, if not negative, GDP growth for Q1 2015.
Barring a cut in production at the June OPEC meeting, or a substantial dislocation in supply due to a geopolitical event, we believe the worldwide oil market will continue to be oversupplied. We foresee oil prices struggling to increase appreciably above current levels perhaps until Q2 of 2016. We had previously predicted a rebound beginning in Q3 of 2015, but recent information has indicated that the declining rig count and the steep decline curve for US onshore shale well production will not result in a sustained and steady decline in worldwide production levels due to a large increases in offshore production (especially the Gulf Of Mexico) scheduled for mid to late 2015. Many new large offshore fields are coming on line, and as a result, we now predict that truly sustainable and steady prices increases north of $70 a barrel will elude the market until Q2 2016.
We also believe that the recent rise in energy equity prices may be short lived with a re-test of December lows driven by energy companies’ Q1 2015 financial results.
Investors are encouraged not to chase recent momentum in any sector, and to use patience when deciding when to buy over the near term.