Market Insights: April 29, 2014
Economic Outlook: The weight of the evidence…
- Most of the economic signals we pay attention to continue to paint a positive picture.
- The most recent University of Michigan survey on Consumer Sentiment is at the highest level in almost a year. The Index of Leading Economic Indicators moved up again in the past week and is showing annual growth north of 4.0%.
- Manufacturing seems to be continuing its rebound in the Spring. Durable Goods Orders increased 2.6% in March.
- Housing data is the outlier — still in a bit of a soft spot, with Existing Home Sales edging down 0.2% in March. This likely reflects firmer mortgage rates. New Home sales also dropped in March.
- European Union PMI Composite flash estimate rose to 54 in April, which is a good indicator for both manufacturing and the service sector. [Markit]
Equities Outlook: Are the ‘animal spirits’ finally loose?
- It is starting to look as though some of that hoard of cash on corporate balance sheets may be edging off the sidelines. Merger and Acquisition activity seems to be heating up, which could provide further support for equities.
- The most recent announcement of a potential bid by Pfizer for AstraZeneca could be potentially a huge deal. This is on the heels of an announcement by Glaxo and Novartis to combine forces on consumer healthcare products.
- Comcast announced a plan to shed some of its subscribers to satisfy regulators and facilitate its deal to acquire Time Warner. GE is bidding for the French company, Alstom, and met this weekend with French officials to facilitate necessary approvals. We may see much more news of this type, as the year unfolds. The corporate cash for M&A activity represents a significant source of buying demand in the market. This may signal that we are now in a different, less intense phase of the deleveraging cycle.
- In the most recent addition of Barrons, a survey of portfolio managers showed only 9% judging the U.S. equity market to be undervalued. Further, only 56% of portfolio managers consider themselves “bullish” which is a decided decrease from the fall of last year.
- A decrease in optimism about equities (and even misgivings about valuation) has historically been a bullish contrarian indicator for the market.
- We’ve been discussing for several months the European equity market’s favorable valuations. Equities in Europe are now up 3.5% year-to-date, better than the 2.26% gain on the U.S. S&P 500.
The Fed and Fixed Income Markets: Not a time to reach for yield…
- The Ten-Year Treasury has opened the current week at a yield of 2.69%, a touch down from the previous holiday-shortened week.
- Last week was quiet in terms of Fed activity. Bond rates remain low across the yield curve. This seems premised on an apparent belief that economic growth is slowing. Based upon some of the metrics we cited above, we do not particularly share this view. As a result, we believe bond investors need to be cautious about reaching out the maturity spectrum for yield. We consider duration risk to be more important than credit risk in this environment.
- We do not assess longer maturity bonds as offering much assurance of a yield that will exceed inflation. Without sounding any major alarm bells, we see some preliminary signs that inflation pressures may be building within some of the commodity markets.
- Likewise, there are some early signs of increasing wage pressures. Prior to the downturn in 2008–2009, the average hourly earnings were advancing at about a 4.0% annual rate. After the downturn, this rate of increase steadily declined and reached a low in late 2012 of only 1.5% per year. Over the past 16 months, this rate of increase has moved up steadily to a rate of 2.5%. Admittedly this is not where it was before the financial crisis, but it is made up significant ground from the lows.
The Week Ahead:
- S&P Case Shiller Home Price Index (S&P, Case-Shiller), [U.S.]
- Consumer Confidence (Conference Board), [U.S.]
- ADP Employment Report (ADP), [U.S.]
- GDP (BEA), [U.S.]
- FOMC meeting announcement
- Personal Income and Outlays (BEA, Dept of Commerce), [U.S.]
- Employment Report (BLS), [U.S.]