Market Commentary - 1.9.15

It's Not Just the Jobs Report

Friday morning, the Labor Department provided good news on the U.S. job market. For December, the government reported a gain of 252k jobs, above the consensus estimate of 230k jobs, and the unemployment rate dropped to a six year low of 5.6%. Investor reaction, however, has been muted. While Friday’s numbers were pretty good, it really should not be too surprising – earlier in the week the government reported that weekly jobless claims had fallen, and payroll processing firm ADP also announced better-than-expected employment readings. In reaction to those reports, U.S. equities had already posted two straight days of strong performance. Though investor reaction to the employment report was mixed, as we noted in our 2015 Market Outlook, Fifteen to Watch in ’15, we believe there are other factors likely to drive stock market returns for the year.

In our outlook, we conveyed our expectations for elevated market volatility in 2015, which we have already begun to see in just the first week of the year. Early in the week, the market declined sharply as investors reacted negatively to weakness in oil prices. While lower oil prices are considered good for consumer spending and retail sales, prolonged weakness in oil prices hurts profits of energy companies and may reduce their plans for capital expenditure. Mid-week, in addition to the previously noted positive readings on the labor market, stability in crude prices and commentary from central bankers in the U.S. and Europe helped to reverse market sentiment. In particular, Federal Reserve Bank of Chicago President Charles Evans stated that he does not think the Fed should be in a hurry to raise rates, while European Central Bank President Mario Draghi provided more details around their quantitative easing program.

While the direction of interest rates and potential central bank actions were noted as key market factors in our 2015 outlook, we also highlighted other influences that will likely drive investor sentiment. These include inflation (or lack thereof), the impact of the stronger US dollar on corporate profits, improvement in credit availability for consumers and businesses, increasing geopolitical risks outside the U.S., the political environment in Washington and its effect on spending, and stock market fundamentals. Regarding the last point, we believe valuations are just right based on common metrics – neither too expensive, nor too cheap. Also, corporate earnings continue to look solid for 2015 with consensus estimates suggesting S&P 500 profits may rise 13.7%.

Taking these items into account, we would summarize our outlook for 2015 as follows: growth in the United States, while still not as robust as in previous recoveries, will be strong enough to allow the Fed to raise interest rates; the decline in oil prices will be, on balance, positive for global growth; and quantitative easing programs in Europe and Japan should allow those economies to avoid a downturn.

In this environment, we continue to maintain an allocation to equities based on long-term investment objectives. We favor domestic over international equities. We recommend an essentially defensive position in fixed income, which means overweighting bonds that offer a yield spread over Treasuries (such as investment grade corporate bonds) and overall portfolio interest rate sensitivity below that of the benchmark. Finally, to mitigate the effects of market volatility on a portfolio, we believe it makes sense to retain an allocation to alternative investments due to their low correlation to traditional investments. Please see our 2015 Market Outlook for more details.

This information is compiled by Cetera Investment Management.

About Cetera Investment Management
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