Market Insights: April 14, 2014
Economic Outlook: Jobs & Sentiment, both positive…
- Jobless claims have now fallen to a level of 300,000. Historically-speaking, this is a level indicative of strong economic and GDP growth.
- On a related note, the Job Opening and Labor Turnover Survey (JOLTS) for February showed that job openings in the U.S. increased to 4.1 million, the highest level since the beginning of 2008. This is certainly not a level indicative of the possible onset of recession.
- The NFIB Small Business Optimism Index rose in March to 93.4 from 91.4 in February. Small business is the major employer in terms of job creation.
- Last week’s report of Consumer Sentiment for April [University of Michigan] rose to the highest level in nine months. Strong numbers posted for both current conditions and the future expectations components, which bode well for continued economic growth.
- Inflation numbers in Europe have remained extremely low as we’ve discussed in recent weeks. The IMF’s Christine Lagarde spoke last week and warned the ECB against allowing a prolonged period of low inflation. She recommended “monetary easing, including unconventional measures…” Policy measures of this type are likely to be supportive to the equity market recovery in Europe.
Equities Outlook: A normal rotation and consolidation…
- Global markets were marked by volatility last week. Markets ran up on Wednesday after the release of the FOMC minutes. The week finished, however, on a strong down note. The sectors with higher valuations felt the heat the most. Ex: Biotechs gave up 5.5% in Thursday’s sell-off and are now down 20% in the past six weeks. Technology in general has been hit pretty hard, as evidenced by the NASDAQ’s decline on Thursday and Friday.
- Most of the volatility has been concentrated in the higher-valuation, high-flying sectors. Blue chip indexes remain within about 5% of their recent highs.
- The impact of the market movement on stocks of different sectors can be seen pretty clearly in the past month’s price movement comparison of growth and value stocks. The Russell 1000 Growth Index is down more than 5% in the past month. The comparable Russell 1000 Value Index is off less than 1-1/2% in the same period.
- We’ve been talking about the strong possibility of a correction in stock prices which could be considered somewhat “overdue”, since we’ve not had a 10% pullback since 2011. As noted in the Russell Index numbers, this has the appearance of a normal defensive rotation and consolidation, not a reason to panic. For cash that has been sitting on the sidelines, good opportunities could present themselves.
The Fed and Fixed Income Markets:
- The Ten-Year Treasury moved a down in yield during the week, attracting defensive money. At week’s end, it closed at a yield of 2.62%.
- So far this year, economic data has failed to underpin an upward movement in rates and the combination of Crimea events and an unsettled equity market has in fact produced just the opposite.
- The latest numbers for the Federal Budget Deficit came in at $37 billion, a $71 billion improvement from March of 2013. The deficit fell below 3% of GDP in 1Q, the first time this has happened since early 2008.
- U.S. government revenues for March were 16% higher than in March of 2013. This revenue increase, reflecting the improvement in the economy, accounted for much of the reduction in the deficit. The deficit in March one year ago exceeded $100 billion.
- From the FOMC Minutes released last week, it is evident that the majority of Fed Governors believe Fed policy is likely to remain loose for years, not months. The bottom line is that the tapering of QE policy will continue unless the data fluctuates dramatically, which so far has not occurred.
The Week Ahead:
- Retail Sales (Census, Dept of Commerce), [U.S.]
- CPI (BLS), [U.S.]
- Housing Starts (Census, HUD), [U.S.]
- Industrial Production (Federal Reserve Board of Governors), [U.S.]
Friday (Good Friday)
- Leading Indicators (Conference Board), [U.S.]