The markets saw some volatility this week as some additional earnings reports came in. As of this morning, 447 companies in the S&P 500 have now reported their quarterly earnings. Of those companies, 71% reported earnings higher than expected, while 45% reported revenues higher than expected. With most of the S&P 500 companies reporting, we can provide an update on how various sectors performed. The Health Care sector experienced the highest year-over-year earnings growth rate, with 22.3%*, led largely by Gilead. The Financial sector came next with a growth rate of 13.4%*, led by Bank of America. On the flip side, the Energy sector was the biggest detractor to earnings growth, as their earnings declined 56.6%* over last year. Excluding the Energy sector, the blended earnings growth rate for the S&P 500 would be 7.7%*. However, the Energy sector’s earnings bring this number down to 0.1%*.
*Growth rates were found using FactSet data.
The strong jobs report released today propelled most U.S. markets back into positive territory for the week. Below is a summary of how various markets performed this week:
Index Level 1 Week YTD
Dow Jones 18,191.11 0.93% 2.06%
S&P 500 2,116.10 0.37% 2.78%
NASDAQ 5,003.54 -0.04% 5.65%
WTI Oil 59.37 0.37% 10.99%
MSCI EAFE 1,925.44 0.37% 8.48%
MSCI EM* 1,024.91 -2.02% 7.17%
*As of 5/7/2015
Sources: Dow Jones website, S&P website, NASDAQ website, Bloomberg, MSCI website
U.S. Adds 223,000 Jobs in April:
U.S. employers added 223,000 jobs in April, signaling the economy is bouncing back from the harsh winter. This was slightly below the average economist estimate of 228,000, but was a sizable rebound from March’s weak gain of 126,000. The unemployment rate also fell to 5.4%, down from 5.5% last month. Hourly earnings rose 0.1% from last month, lower than the 0.2% increase that was expected. The 5.4% unemployment rate is now at its lowest level since 2008, before the financial crisis.
The U-6 Rate, a measure that covers the unemployed, underemployed, and those who are not looking for a job but would like one, continues its fall and is now at 10.8%, down from a peak of 17.1% in 2009 and 2010. While 10.8% is certainly an improvement, it is still a bit higher than the 7 – 8% that is generally indicative of “full employment” and shows that there is still some room to go. The U-6 Rate is important to consider, as Janet Yellen seems to favor it when she talks about full employment and therefore gives us a better feel for the Fed’s thinking for when they feel enough economic measures have been met in order to raise interest rates.
Today’s reaction to the jobs report was positive, as the increase shows a strengthening economy. However, the other positive from this (from the market’s perspective) is that, while the numbers were good, they were “weak enough” to perhaps keep the Fed from raising interest rates until later in the year. If you recall, back in March, the February jobs number blew expectations out of the water and the market fell because that was seen as reason for the Fed to raise interest rates sooner.
Poll Results in the United Kingdom:
The Conservative Party had a strong showing at Election Day yesterday in the United Kingdom. This was a bit of a surprise, given that pre-election polls indicated an even split between the Conservative Party and the Labour Party. There is good news and bad news that comes out of this, however. The good news is that, with an outright victory, the UK will avoid coalition building due to inconclusive election results. The Tories (Conservative Party) now have outright control over Parliament. The bad news is seen in Scotland, where the Labour Party lost nearly all their seats to the Scottish National Party. This seems to indicate that big changes will be coming. Namely, Scotland may try to “break off” from the United Kingdom.
What Should I do with my Old 401(k)?
When you retire or even when you change jobs, it is likely that you participated in a 401(k) plan with your former employer. In most cases, it does make sense to rollover (tax free) that old 401(k) into an IRA account. However, there are some considerations to take into account when you are deciding whether it makes sense to rollover your old 401(k) funds into an IRA. Below are a few reasons why it may make sense to roll your 401(k) over to an IRA:
Reduced Fees: Your 401(k) plan has administrative fees which will cut into your investment returns over the years. Often it is not exactly clear what administrative fees you are actually being charged. By rolling over your 401(k) into an IRA, you may be able to avoid paying administrative costs.
More control: Sometimes that plan will impose certain restrictions on the underlying investments. For example, some employers can dictate how the “employer” contribution will be invested and the employee has no control of these funds.
Less Concentration: Many employees have a large portion of their 401(k) savings invested in their employer’s stock. Some companies even invest their employer contribution directly into company stock. In many cases this causes many people to have an “over-allocation” to one particular company and increases their portfolio’s risk dramatically. The, “too many eggs in one basket” quote applies in these type of situations.
Better investment choices: Your 401(k) will often be limited to a set number of investment choices that are determined by the plans trustees, administrator, etc… Unfortunately, many times the funds in your plan will have a higher than average expense ratio and often these funds are not the best performing funds for their respective asset class. If you roll your money into an IRA, then you can invest in anything you want; stocks, bonds, mutual funds, ETFs, REITs, partnerships, index funds, etc..
Consolidate and Simplify: If you have changed jobs a few times in the past you may still have a few 401(k) accounts with your former employers. It is much easier to manage your investments if they are all in one IRA instead of many different 401(k)’s. A single IRA also makes it much easier to review your portfolio’s performance and also manage required minimum distributions when you reach the age 70.5.
In some cases it may make sense to keep your assets in a former employers 401(k) account. If you are over age 55 and below age 59.5 and need to start taking distributions to supplement income, your plan may allow you to take distributions without incurring the 10% early withdrawal tax penalty. Note: you can also start taking distributions from an IRA before age 59.5 without incurring the early withdrawal penalty if you set up a 72(t) distribution, which mandates regular withdrawals for at least five years and limits the amount of those equal distributions.
Also, your 401(k) plan may offer a stable value fund that has an attractive yield. Stable value funds are not available in an IRA account.
There are numerous things that you will have to deal with when you leave your job or retire, but do not forget about your retirement account.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.