Market Insights: April 7, 2014
Economic Outlook: No clouds yet building on the horizon…
- The economic metrics continue to look solid for 2014. The Leading Economic Indicators Index has moved to another recovery high and now is solidly above its 18-month moving average. Historically, the lead time from a peak in the LEI to the start of recession has been more than 7 months. This pretty well rules out any recession beginning in 2014. Market reversals are normally associated with recession.
- The ISM Manufacturing Index rose to 53.7 in March from a reading of 53.2 in February. This increase was not confirmed by the separate reading from Markit’s measure, which is the PMI Manufacturing Index. The PMI index declined slightly in March, but showed a very strong new orders component at 58.1.
- ISM’s Non-Manufacturing Index also rose in March to 53.1. The individual components for new orders and employment both registered strong readings, indicating a bounce-back from the lower weather-induced readings in February.
- Last week’s employment report from ADP estimated private payrolls in March at 191,000. This represents a nice increase from the level of 178,000 in the previous month and extends a positive uptrend from the dip that was experienced in late 2013.
- March auto sales posted strong at 1.5 million for the month, and an annualized rate above 15 million. Even General Motors’ sales of new vehicles were up 4% despite the controversy over their recent safety recalls on older vehicles.
- PMI Manufacturing Index for the European Union remains in expansion mode at 53 for March. Every member of the European Union was in positive territory, save and except Greece. Even Greece, however, finished only barely negative at 49.7.
- The PMI Manufacturing Index for Great Britain also remained strongly in positive territory at 55.3 for March.
- Sentiment reported among Japanese manufacturers has now returned to the highest level since 2007.
Equities Outlook: Catching a breath…
- The market environment is apparently thawing out along with the weather. Global stock markets have enjoyed a strong week last week. Even Emerging Markets have now enjoyed a couple of positive weeks in a row.
- We’ve written in recent weeks about market valuation being neither cheap nor expensive. At this level in the market, some rotation in favor of stocks with more stability to their earnings is to be expected.
- Much of the recent market movements suggest exactly such a rotation from growth stocks to value stocks, where multiples are lower on more predictable earnings. It is reasonable to expect sectors like Telecom, Financials and Energy to gain ascendancy in this kind of environment. This is exactly what has happened during March.
- Technically speaking, the S&P 500 Index has broken resistance levels to new highs, though not on strong volume. We have written previously about our review of James Stack’s digest of various technical measures of market health. He summarized his appraisal last week by saying “there’s only one way to describe breadth, bellwethers and leadership: bullish.”
- We believe the market may very well pause some during 2014 to take a breath, but the broad trend appears to be for continued gains.
The Fed and Fixed Income Markets: Support that is extraordinary…
- The Ten-Year Treasury moved a bit in yield during the week, but finished unchanged. At week’s end, it closed at its previous week yield of 2.72%.
- Fed chair Janet Yellen spoke last Monday and attempted to provide more reassurance for the financial markets. She stated that the economy is likely to continue to require “extraordinary support quote for quite some time”. Yellen stated that she has a strong commitment to maintaining extraordinary support.
- Acknowledging those statements, we cannot ignore, however recent signals by Federal Reserve officials that their intention may be to raise rates earlier (2015) rather than later (2016), it is logical to anticipate some flattening in the yield curve. Short-term rates may first move higher and we may observe long-term rates decline modestly at the same time.
The Week Ahead:
- Federal Reserve Open Market Committee minutes released, [U.S]
- Jobless Claims, [U.S]
- Consumer Sentiment (University of Michigan), [U.S]