Earnings Season Helps Counterpunch Geopolitical Turmoil

by: , Chief Investment Officer and Managing Director | IndexIQ

International markets outperformed the U.S. in April. U.S. markets posted slightly positive results, as geopolitical news seemed to dominate the headlines. In the beginning of the month, there was a particular focus on tariff negotiations with China, as the possibility of a trade war loomed over the market. The administration also announced sanctions against 24 Russian oligarchs, which allowed aluminum prices to spike. These unexpected events allowed increased volatility to remain in the markets, after the spike in the prior months.

Earnings season was in full effect the past month, and a majority of companies didn’t disappoint. With new corporate tax reform, many market participants expected companies to start reporting strong earnings, and they did just that. Every sector in the S&P 500 beat analysts’ expectations on earnings, and nine out of 11 sectors beat expectations on sales. This allowed the market to have a few strong performance days to counterpunch the down days caused by uncertainty in the geopolitical climate.

The yield curve continued to flatten over the month, as both long- and short-term rates continue to rise. The 10-year rate reached 3%, before slightly pulling back at the end of the month. Credit spreads tightened throughout the month, as yields on risky bonds fell and increased for investment grade. The dollar finished the month stronger against most major currencies, and oil continued to rise, hitting its highest level since December of 2014.

On the economic front, the advanced estimate of GDP was 2.3%, which exceeded expectations. Headline inflation increased to 2.1%. Employment gains decreased and fell short of expectations. Consumer confidence increased and beat expectations.

Hedge funds posted positive results, with the broad index (HFRI Hedge Fund of Funds Index) up for the month. Five out of the eight strategies had positive returns, with Distressed Restructuring and Global Macro leading the way, up 0.44% and 0.46%, respectively. Long/Short Equity was down -0.55% for the month.1

Key Economic Data1

  • The U.S. Bureau of Economic Analysis (BEA) released the “advanced” estimate of real gross domestic product (GDP) growth of 2.3% in the first quarter of 2018. Real GDP grew by 2.9% in the fourth quarter of 2017, 3.2% in the third quarter of 2017, and 3.1% in the second quarter of 2017.
  • Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was down -.01%. Core inflation (CPI-Ex Food and Energy) was 0.2%. For the last 12 months, the CPI-U NSA was 2.4% and the CPI-Ex Food and Energy was 2.1%.
  • The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 103,000, after increasing a revised 13,000 jobs in the prior month. Private sector payroll employment gained 102,000 jobs, following a revised increase of 33,000 jobs in the prior month. The unemployment rate was 4.1%. The underemployment rate was 8.0%. The labor force participation rate was 63% last month.
  • The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 694,000, a change of 4%. Housing starts were 1,319K, a change of 1.9%. Building permits were 1,354K units, a change of 2.5%. Existing home sales were 5.6 million units, a change of 1.1%.
  • The Conference Board Consumer Confidence Index® was 128.7.

1. IndexIQ, FactSet, as of 4/30/18.

The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.

yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.

credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.

Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds that involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.

Distressed/Restructuring strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.

A Global Macro strategy is a strategy that bases its holdings, such as long and short positions in various equity, fixed-income, currency, commodities, and futures markets, primarily on the overall economic and political views of various countries, or their macroeconomic principles.

Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.

Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.

Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.

Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two securities.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The U.S. Consumer Price Index (CPI) is a set of consumer price indices calculated by the U.S. Bureau of Labor Statistics (BLS). To be precise, the BLS routinely computes many different CPIs that are used for different purposes. Each is a time series measure of the price of consumer goods and services.

Consumer Price Index for All Urban Consumers (CPI-U) – A measure that examines the changes in the price of a basket of goods and services purchased by urban consumers.

The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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