Currency risk can best be described as the surprise impact that currency exposure has on an investment portfolio. Although currency risk typically confounds investors, it is easy to measure – it is the difference in the return to an unhedged portfolio position versus that portfolio position hedged back to the investor’s domestic currency. So simple to measure, yet so difficult to figure out.
Nonfarm payroll employment increased by 215,000 in March and the unemployment rate was little changed at 5.0 percent. Strong job gains were reported in retail trade, construction, and health care, which offset declines in manufacturing and mining. The revisions for January and February were minimal (a net change of just 1,000), which placed the average payroll increase during the quarter at 209,000, only slightly below the 223,000 per month pace registered during the past 12 months.
Only weeks into 2016 it felt like the worst parts of 2015. However, after selling off 230 points and testing the 1812 area in mid-February, the S&P 500 rallied almost 250 points in the second half of the quarter. One catalyst for the rally was stable domestic economic data supportive of the thesis that the U.S. is economically healthier than many of its global counterparts. Another catalyst was the bounce in oil prices that provided a financial reprieve for the distressed energy sector and ultimately turned one of the laggards in the global markets over the last few years, emerging markets equities, into one of the strongest performers.
One of the challenges for U.S. corporations the last several quarters has been maintaining positive earnings. The sharp drop in raw material prices and weak overseas economic activity have fueled what is likely to be yet another disappointing quarter. According to FactSet, 2016:Q1 S&P 500 earnings are estimated to decline 8.5 percent from year-ago levels, which would represent the fourth consecutive yearly decline in earnings from the peak early last year. During the quarter, many equity analysts lowered earnings projections by close to 10 percent on a bottom-up basis, with the greatest weakness centered in the energy sector. This is roughly double the typical four to five percent downward adjustment to earnings registered during the majority of the last five years, but is still well below the close to 27 percent downward revision in earnings registered in 2009:Q1.
The first quarter ended with investors feeling thankful for the returns they had but concerned about the potential for another weak earnings season and a lackluster tabulation of real GDP. As such April had an inauspicious start with the S&P 500 losing almost 1 percent in the first seven days of trading. However, since the first earnings report on last Monday, the S&P 500 has gained 1.64 percent and banks have doubled that returning almost 4 percent.