As I write in my weekly commentary, last week’s continued advance for stocks means they are now ahead of bonds for the year. Helping matters: Signs of stabilization in many international economies, which indicates global growth is steadying after declining last year.
In Europe, sentiment was buoyed by a tentative ceasefire in Ukraine, even though issues linger in Greece, where the government and the European Union are still struggling to come to an agreement over the country’s debt obligations. For now, investors are looking past some still noticeable weaknesses and potential headwinds. European economic indicators have recently surprised on the upside, with an unexpected jump in Germany’s fourth-quarter gross domestic product (GDP) being the most notable. Economic improvement, along with a weaker euro and increased bank lending, are having an impact. In particular, industrial and auto companies are seeing significant better sales numbers.
Elsewhere, Japan also appears to be shaking off its recent lethargy. Strong manufacturing data included a substantial increase in core machine orders. And while emerging markets as a whole have not quite regained their old swagger, economies such as India are in a turnaround. It now appears that India actually outgrew China in the final quarter of 2014.
Here at home, however, there are some disappointments. U.S. retail sales fell for a second month in a row as consumers are saving, not spending, their windfall from lower gasoline prices. This suggests to us that even with a stronger labor market, the U.S. consumer will no longer be the engine of global growth.
From a sector perspective, we see investors are starting to rotate into more cyclical parts of the stock market, a trend that we would endorse. One area where we see opportunity is technology. Major technology companies such as Cisco and Apple reported strong earnings reports last week, pushing the U.S. technology sector up over 4% and the NASDAQ Composite Index to its highest level since early 2000 for the week.
Another sector worth considering is energy, specifically the large integrated oil companies, which are starting to respond to recently rising oil prices. The catalysts for last week’s rally: a further drop in the U.S. oil rig count, which indicates supplies may tighten and push prices higher, as well as the GDP acceleration in Europe. We believe this signals some stabilization in the global economy and, by extension, demand for oil. The S&P Global Energy Index is up roughly 13% from its recent lows and is now positive year-to-date. We continue to see value in this segment of the market.