- Low volatility
- Generally positive results for many investments
- Large drop in gold
- Some softer economic numbers
- Mixed markets around the world
In the most recent month, risk assets, many of which have experienced double-digit gains year to date, remain generally positive, despite perceptions of slowing global growth. Indeed, more cyclical areas of investment, such as commodities, posted weaker returns as hopes of a more robust recovery in emerging market economies disappointed investors.
Lars Schuster, institutional portfolio manager with Fidelity’s Strategic Advisers, Inc., and Dirk Hofschire, senior vice president of asset allocation research, discuss the markets in their monthly market update.
Schuster: Let’s review the last month here in the markets, April 2013.
Hofschire: The last few weeks have generally been pretty calm. We've had low volatility and generally positive results out of many asset categories. Japanese stocks have continued to go up. We've also seen a slight decline in interest rates from where we were a month or two ago, so many bond categories have turned positive. We still do have laggards. They tend to be more tied to the global economy, things like commodities and emerging market stocks. But overall, we've had a pretty calm backdrop here and fairly solid investment results so far.
Schuster: Let’s go back to the beginning of the year. Individuals generally felt that the U.S. economy was expanding, sentiment was improving, and housing was doing well. Now, the perception seems to be that the U.S. economy may be a bit weaker. Is this true or a misperception?
Hofschire: I think the tone of the numbers has been softer recently. Part of that is probably due to some of the fiscal drag from the payroll and tax increases that started at the beginning of the year. Now, we have the sequestration cuts starting. But the other part is that there is some artificial aspect to this. Some of it might be seasonal adjustments. Ever since the financial crisis in 2008, when we had really weak economic results at the end of the year, and in the beginning of 2009, we've been thrown off. Things have seemed better during the winter and worse during the summer because of seasonal adjustments. So part of the softer numbers could just be due to usual ups and downs. Consumer numbers, for instance, were stronger than expected in January and February, and have been a little weaker than expected in March and April.
We think that the underlying trends are mostly still fairly solid. Employment markets are healing slowly, but they're still healing. Credit conditions, in general, are very supportive of growth. The housing recovery is still very much under way. So in general, we would still characterize what we're seeing here in the U.S. as a slow mid-cycle expansion.
Schuster: Let's look outside the U.S. What are the economic conditions in Europe and, broadly, across other international economies?
Hofschire: Globally, I think the data recently has been even more disappointing. It's not so much that we're seeing a global downturn, in our opinion, but it’s that people are expecting the global economy to be in a better recovery mode than it has shown over the past couple of months. It’s really mixed when you look around the world. Japan has been a real bright spot. Prime Minister Abe's monetary policies, and extremely accommodative quantitative easing policies by the Central Bank, have done a number of things. He’s targeting higher positive inflation in Japan. That's boosted consumer sentiment, household sentiment. The stock market has gone up there. The yen has depreciated. That helps the competitiveness of their exporters, so the early cycle recovery in Japan has really been gaining steam.
On the other hand, the conditions in Europe are lackluster. The good news is that the financial conditions have remained calm, despite the bailout in Cyprus and some political noise around Italian elections. But there really hasn't been much traction, so most of those economies are still in a recessionary mode. Then, you look at the developing world of emerging markets. There is a recovery in China, but it hasn’t really been getting as much bang for the buck as you might expect, given all the credit that has poured into their economy. Other big emerging markets, like India and Brazil, are not growing at near the pace that they were a couple of years ago. So overall, global growth is uneven. It's probably getting better, but it has recently been disappointing relative to people's expectations.
Schuster: So is the disappointment-versus-expectations a meaningful explanation of why commodities have had some weakness more recently?
Hofschire: Yes, I think it's definitely part of it. When you think back, commodities have really been in this long-term supercycle since around 2000, where prices have continuously gone up. And now, whether you’re talking about energy, industrial metals, or agriculture, most of these prices are now at the low end of the range of where they've been the past couple of years. For example, copper prices, recently dropped to the lowest level we've seen since 2011. So part of it probably is demand, the weaker than expected global economy, especially in China, and in developing markets where there's still a fair amount of demand for commodities in general. Part of the price drop is probably also due to supply. After a decade or so of rising prices, you're now starting to see more supply coming back online, particularly in areas like industrial metals. So this could be a time where we have more of a trading range for commodities going forward than this continuous supercycle that we've been accustomed to.
Schuster: The first half of April, we saw historic declines in gold that we have not experienced in decades, then some rebound. Where are we with the direction of gold?
Hofschire: Yes, a very large drop in gold recently, back to lows that we haven't seen for a couple of years. Gold is hard to pin down. It's not really like other commodities. You dig up most commodities from the ground and produce them. It becomes a supply-demand issue. Once you use it, it's gone from the supply. Gold is very different. It does have some demand, of course, for jewelry, but a lot of the incremental demand for gold comes from investment purposes. So there is no cash flow to gold, and it's a hard thing to value versus other assets. So it is sometimes hard to figure out why it moves up and down.
When you think about the reasons people like to own gold as an asset class, a lot of times it's an alternative currency to paper currency. So the times that it has been beneficial in the past to own it are when people are worried about the value of paper currencies. That can be when inflation expectations are going up, when the dollar is weak, or when there is risk to the global financial system. Recently, a lot of these things haven't been particularly supportive of gold. Systemic risk has been falling as the risk in Europe and other places hasn't been in the headlines as much. The dollar has actually been relatively strong. Inflation expectations have been very subdued. So that, along with some technical trading issues we’ve seen recently, have really caused this slump. However, I think, going forward, central banks are still easing. We mentioned Japan, but certainly it's the Federal Reserve, and other central banks around the world, so real interest rates are still very, very low. There's a lot of liquidity out there. We are seeing some attempts to depreciate paper currencies, so it may be too soon to really claim that this gold run that has been going on for so long has completely reversed. I think it's certainly a reminder that gold can be a very volatile asset class in the near term.
Schuster: So when we put all this together, today we have a U.S. economy in a slow mid-cycle expansion; some disappointment outside of the U.S., economically speaking; commodity weakness; volatile gold prices—what's an investor to think about some of this?
Hofschire: I think investors have a few questions. Have some of these markets come too far, too fast, given the fundamentals? Are we going to be in for another summer swoon like we've seen in some of the recent years? And at this point in the cycle, after we've had four years or so of a bull market in many equities, I think it does make sense to be careful about your expectations. You shouldn't really be expecting outsized gains at this point. However, when you look at the basic conditions, we have pretty low inflation, we have a lot of monetary support, and we have a global economy that's not particularly robust, but it's also not weakening. So these things, together, are a decent backdrop overall. So what it means, as always, is to try to stick to your guns in terms of what you're thinking for your overall investment strategy. It's not a terrible backdrop, from my perspective.