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The oil industry has been spinning its wheels for the past several months. 

With oil prices stalled at around $50 a barrel (West Texas Intermediate), the Energy Sector of the S&P 500 has declined for four consecutive months through April. The sector is down 9.38% for 2017. That’s a sharp contrast to the rest of the stock market this year, which has seen gains in nine of the other 10 sectors.

After an abysmal start to 2016, when oil prices dropped to under $27 a barrel, oil steadily rallied through most of 2016, topping $50 in October. The market got another small boost at the end of November when OPEC agreed to cut production in order to bring supply and demand more into balance.  

But prices have been treading water since then. After closing March 31 at $50.60 a barrel, oil dipped again into the high $40s, ending April at $49.33.

Ironically, the market has been a victim of its own success. As prices rose, a growing number of oil operations ramped up production in the U.S. and other oil producing nations, partially offsetting the impact of the OPEC cuts. Creating further uncertainty in the market is an upcoming OPEC meeting, May 25, where the ministers are expected to vote on whether to extend the production cuts. If OPEC votes to continue the cuts, oil prices are expected to rise, but if they discontinue the cuts, prices may drop below current levels.

The one factor that favors the oil industry is the strong global economy. As the economy grows, oil demand grows with it. Even if production continues to rise, growing demand will help bring supply and demand back into balance, which would likely push prices up high enough to enable producers to make an adequate profit.

See the video: “The Oil Recovery and Your Price at the Pump” with John Groton, Director of Equity Research for Thrivent Asset Management

Here are some other highlights from the month, covered in more detail later in this report:

  • Mixed employment report. New hires in the U.S. dropped to just 98,000 in March, but the unemployment rate sank to just 4.5% – the lowest level in a decade, according to the U.S. Department of Labor.
  • Retail sales stall. After several solid months of retail sales growth, sales stalled in March, dropping 0.2% from the previous month, according to the April 14 retail sales report from the U.S. Department of Commerce. 
  • Interest rates continue slow slide. Market interest rates have failed to gain traction this year. Rates for 10-year U.S. Treasuries dropped from 2.39% to 2.28% during April.
In a Nutshell Chart

Drilling Down

U.S. Stocks End April on an Upswing

After a sluggish start to April, stocks rallied to finish the month with a small gain. The S&P 500 ended the month at 2,384.20, up 0.91% from its March 31 close of 2,362.72.

The total return of the S&P 500 for April was 1.03%. For the year, the total return was 7.16%.

The NASDAQ continued its steady 2017 growth, with a 2.30% gain for April. It was up 12.34% for the year.

S&P 500 Index

Mixed Employment Picture

Only 98,000 new nonfarm jobs were added to the U.S. labor market in March, according to the U.S. Department of Labor, Bureau of Labor Statistics Employment Situation report issued April 7, but some other related statistics paint a more positive picture. 

Despite the low number of new hires, the unemployment rate dropped to just 4.5% – the lowest unemployment rate since May 2007. The Department of Labor Household Survey showed that the labor force grew by 145,000, the number of people on unemployment dropped by 326,000, and the total number of employed individuals in the civilian labor force jumped by 472,000.

Initial jobless claims, reported weekly, also remain at an extraordinarily low level. Initial unemployment claims totaled just 234,000 during the final week of March, which is one of the lowest levels since the mid-1970s. The labor force participation rate for those in their prime working years (age 25-54) remains at a fairly low level, but continues to improve. In March, it moved up from 81.7% to 81.8%, but is still about 1.2% below the pre-recession level.

Retail Sales Weaken

After strong retail sales growth through the first two months of 2017, sales slumped in March, according to the April 14 retail sales report from the U.S. Department of Commerce. Advance estimates of retail and food services sales for March, adjusted for seasonal variation, declined 0.2% from a month earlier, but were still 5.2% above the March 2016 totals. Total sales for the January through March quarter were up 5.4% from the same period a year ago.

Amidst a wave of retail store closing this year, first quarter results provided some insight into the numbers behind those closings. Department store sales were down 4.5% from the first quarter of 2016, sporting goods, hobby, book and music store sales were down 3.8%, and electronics and appliance store sales were down 0.7%. 

On the positive side, the 5.2% year-over-year increase in total retail sales was driven by online and other non-store sales, up 11.9% from the first quarter of 2016 – although sales in March were only up 0.6% from the previous month. Vehicle sales were up 5.6% (but down 1.5% for the month), building materials and related store sales were up 6.3% (but down 1.5% for the month), and health and personal care store sales were up 5.7%. 

Gasoline sales growth actually led all categories with a year over year increase of 14.1%, but that was an anomaly. Gasoline prices had dropped to under $2 a gallon a year earlier, but had moved back up to well over $2 through the first quarter of 2017, so the 14.1% increase was a reflection of the rising cost of gasoline rather than an increase in sales volume.

Sector Returns

Despite a slow month in the market, eight of the 11 sectors managed to finish April with a small gain. Only the Energy, Telecom Services and Financial sectors were in negative territory for the month. 

Information Technology, which has been the strongest sector in 2017 with a 15.41% gain, once again led all sectors in April with a 2.52% gain. Other leading gainers included Consumer Discretionary, up 2.44%, Industrials, up 1.76%, and Health Care, up 1.54%. 

S&P 500 Sectors Chart
Source: Standard & Poor's

Bond Yields Still in Holding Pattern

The market yield on 10-year U.S. Treasuries was little changed over the past month. In fact, it has barely moved through the first four months of 2017. The yield on 10-year Treasuries slipped to 2.28% at the end of April, down slightly from the March 31 closing rate of 2.39% and the December 30, 2016 year-end rate of 2.44%.

While the rate for long-term bonds, such as 10-year Treasuries, has remained near historic lows, money market and other shorter term rates have edged up slightly this year.

US Treasury 10-Year Bond Yields

The Fed is expected to raise rates several more times this year following a 0.25% rate hike March 15, but there was no hike in April, nor has the Fed indicated that a rate hike may be imminent in the next month or two. (See: Fed Approves First Rate Hike of 2017)

Dollar Still Trending Down

With a strengthening economy in Europe, the Euro has continued to trend upward versus the dollar this year. In April, the dollar was down 1.81% versus Euro. For the year, the dollar was down 3.24%.

Euro/US Dollar Exchange Rate

The dollar remained about even versus the Yen in April. After declining by 4.46% versus the Yen through the first quarter of 2017, the dollar inched up 0.04% versus the Yen in April, but remains down 4.43% for 2017.

US Dollar/Japanese Yen Exchange Rate and US/Euro Exchange Rate

Oil Still Sluggish

Oil prices rallied into the low $50s per barrel (West Texas Intermediate) from late March through much of April, but slipped below $50 near the end of the month. It ended the month at $49.33, down 2.51% from the March 31 close of $50.60, and down 8.17% for 2017. (See the video: The Oil Recovery and Your Price at the Pump

 

Oil Price - WTI and Price of Gold graph

Gold Inches Up

Gold continues to trade in a narrow range. After a very small decline in March, gold prices moved up slightly in April from $1,251.20 per ounce to $1,268.30, but remained well below last year’s high of $1,367.10 per ounce on August 2.

Price of Gold graph

International Market Still Moving Up

The international stock market has experienced steady gains this year, with a spike in the MSCI EAFE Index in late April that came after centrist Emmanuel Macron emerged from a preliminary run-off election in France as the favorite to win the presidency in the May 7 final election. 

The MSCI EAFE Index closed the month at 1,833.70, up 2.27% from its March 31 close of 1,792.98.

MSCI EAFE index graph

 

CIO outlook with Russell Swansen, Chief Investment Officer, Thrivent Asset Management

Here’s what we see ahead for the economy and the markets:

Headwinds  

A relapse in oil prices in late April pulled the energy stock sector down for the fourth consecutive month, although most other sectors were in positive territory. Oil supply and demand continues to be out of balance, but we believe that growing global demand will ultimately help balance supply and demand and drive oil prices back up.

The dollar has weakened versus both the Euro and Yen this year, which is helpful for U.S. exporters, but it still remains at a relatively high level. Some estimates suggest the dollar is about 20% overvalued versus the Euro. A strong dollar makes imports cheaper, but makes American goods and services less competitive abroad, and makes foreign earnings less valuable when translated into dollars. 

We continue to be concerned about the pace of earnings growth and weak manufacturing output levels, although early indications for first quarter earnings are strong.  We would also like to see more allocation of assets to fixed investments in areas such as structures, equipment and intellectual property. 

Productivity growth continues to be sluggish and wage growth has been slow, with the median income below the 2009 level. (See: Where's My Raise? As Employment Climbs, Wage Growth Left Behind

The relatively low workforce participation rate among workers age 25 to 54 also continues to be a concern, although we have seen a slow rise in that number in recent months. 

With interest rates still hovering near historic lows, the financial sector continues to face some pressure in the market. 

Retail sales – after several strong months – weakened in April, dropping 0.2% from the previous month. This stands in sharp contrast to consumer confidence which has risen above pre-recession levels.

Tailwinds

Unemployment reached the lowest level since 2007 in April, continuing a strong employment trend. Although the participation rate is relatively low, trends show more people steadily entering the workforce. Proposed government infrastructure spending could lower the unemployment rate still further, boost the workforce participation rate, and push up wages, but the gains could come at the cost of steeper growth of inflation. 

Consumer spending had been one of the lynchpins of the economic recovery, but retail sales dipped in March. However, sales were still up 5.4% versus a year earlier. We expect retail sales to be fairly solid in the months ahead.

The housing market has heated up recently, with improved building activity and rising prices in many parts of the country. 

Expectations

U.S. gross domestic product (GDP) growth slowed to an annualized rate of just 0.7% in the first quarter of 2017 – the lowest growth rate in three years – according to the advance estimate of the U.S. Department Commerce GDP report issued April 28. But we believe the economic outlook is more positive than that rate indicates.

For instance, corporate earnings and revenue expectations have improved markedly this year, housing and oil production has been on the rise, and we believe the employment market and wage growth will continue to improve. The consensus view for GDP growth this year was 2.3%, according to the Blue Chip Economic Indicators, and we believe that is still attainable despite the slow first quarter growth. (See: Weak GDP Growth Figure Obscures Economic Gains)

Inflation growth, which has been slow in recent years, is expected to pick up, but remain at a modest pace for the near future. The consensus view for inflation is 2.4% for 2017 and 2.3% for 2018. That is a bit higher than we might have expected, but if wage growth picks up and consumer spending increases – along with additional government infrastructure spending, we expect that a combination of factors will contribute to rising inflation.

We expect the Fed to continue to raise rates incrementally this year, adding to the March rate hike of 0.25% -- if the economy continues to strengthen. (See: Fed Approves First Rate Hike of 2017)

Further rate hikes could serve to strengthen the dollar, which may be a drag on the profits of U.S. companies that do business abroad. For net savers, however, we believe a series of small rate hikes would be beneficial without adversely affecting the economy or consumer spending. In fact, as noted earlier, money market rates have increased slightly this year, giving investors a very small return on their savings. 

Globally, over the next 12 months, we estimate that China will have GDP growth of about 7%, Japan will have growth of 1.5%, Europe will have growth of about 2%, and the UK will grow about 3%.

While the economy seems to be strengthening, current economic growth remains relatively slow. We are not projecting a recession in the near term, but we believe the risk of recession in the next 12 months remains elevated, though slightly less elevated than a few months ago. To continue the recovery, we believe that the job market needs to continue its steady growth, retail sales need to improve and corporate spending and manufacturing production need to improve.

 

To see our Market Recaps every month and learn more about our perspective on the markets, the economy, and investing, subscribe to our Investing Insights newsletter.

 

Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com

 

All information and representations herein are as of 4/30/17, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Past performance is not a guarantee of future results.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.

The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.

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.

The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.

The MSCI EAFE Index measures developed-economy stocks in Europe, Australasia and the Far East.

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

Performance data cited represents past performance and should not be viewed as an indication of future results. Current performance may be lower or higher than the performance data quoted.

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