Further consolidation leads to soft first quarter for U.S. equity markets

BY ERIC STURDZA

Monthly Fund Commentary
15 Apr 2015

BY ERIC STURDZA

The month of March saw the U.S. equity market decline by -1.74% while the Fund returned -0.16%, outperforming its benchmark for the sixth month in a row. The month was one of consolidation for U.S. stocks, prompted by both a delicate FOMC meeting and somewhat soft economic data.

Currencies and fixed-income markets bore the brunt of the volatility, as many participants’ expected future path of interest rates had to be once again revised.

As expected, the Federal Reserve modified its language to reflect the incremental steps achieved in the direction of a normalization of interest rates. By skillfully directing the markets towards a threshold of “reasonable confidence” in inflation reaching 2% in the midterm to begin any increase, Mrs. Yellen maintains enough room to manoeuvre and provides further credence to her willingness and ability to be data-dependent. Coherently, the interest rate projections by FOMC members were shifted downwards, and by enough to possibly suggest a bias towards a September “liftoff”. 

While always front and centre given today’s prominent role of central banks, the March FOMC meeting was especially significant given the interaction between the apparent softening of economic data in Q1 (including retail sales), the strength of the U.S. Dollar (presumably equivalent to some level of tightening in financial conditions), and the impression of many participants that the Fed had already committed to a normalisation of policy. By once again credibly communicating its data-dependency and flexibility, the Fed was able, for now, to extract itself from this uncomfortable position. 

All in all, the key to understanding the current economic health of the U.S. lies in gauging the impact of the weather which, for a second year in a row, has been unseasonably rough. A number of weak statistics (especially retail sales and housing starts) and, more importantly, a number of divergences (e.g. housing starts vs building permits, payrolls vs job openings vs consumer confidence) could potentially be explained by weather disruptions. While not definitive, this explanation and its parallels with 2014 could well set-up an environment where much of the improvements awaited in the first quarter materialise in the coming months. Notably, high consumer confidence coupled with the yet-to-be-seen impact of lower gasoline and a strong USD could represent a strong combination for the U.S. consumer. The Investment Adviser remains optimistic that as of today, worries of a negative inflexion in growth dynamics are exaggerated.

Looking forward, the coming month will be dominated by earnings publications and additional clues regarding whether the “winter” variable indeed solves the economic data equation. The Fund remains as ever focused on leading, attractively-valued businesses showing an ability to grow by their own merits, and remains convinced of the current portfolio’s prospects. 

The views and statements contained herein are those of Banque Eric Sturdza in their capacity as Investment Advisers to the Fund as of 13/04/15 and are based on internal research and modelling.