Market Insights: August 26, 2014
Economic Outlook: Cross Currents
- Last week continued to draw the contrast between strong economic data in the U.S. and generally weaker data overseas.
- The NAHB Housing Market Index jumped to 55 in August, up from July. This measurement from the National Association of Home Builders has strengthened considerably since the start of 2014 when it was actually in negative territory and signals some stronger confidence in the housing market by builders.
- Existing Home Sales in July advanced 2.4% to a 5.15 million annual rate providing tangible support to the stronger confidence by home builders (National Association of Realtors).
- Indeed, Housing Starts jumped by 15.7% in July after a much smaller decline in June, and are now running at a 1.093 million annual rate in July (Dept of Commerce, HUD). Housing is an important engine to economic recovery and job-creation, since construction tends to be a higher-paying employment sector.
- U.S. job growth in higher wage positions does appear to be picking up. Nearly 40% of the jobs created over the past six months have been in high-wage industries, an increase from 25% during the last half of 2013, according to an analysis by the National Employment Law Project.
- Consumer Price Index data released last week shows price increases averaging 2.0% year-over-year, and a +0.1% uptick in July (BLS). The “Core” measurement is slightly lower at +1.9%.
- Initial Jobless Claims fell back below the key 300,000 level last week, coming in at 298,000 (Dept of Labor).
- PMI Manufacturing Index “Flash” for August posted a very strong reading at 58 last week. The likelihood for economic recession in the near-term for the U.S. appears quite remote. The rest of the world cannot speak with the same confidence.
- On Thursday, the Leading Economic Indicators were released. The latest reading indicates continued gains into August from the month of July. Trending the last couple months for the LEI is a 7.0% rate of increase. This is impressive since it compares to four years ago when the economic recovery was just in its nascent beginning stages.
- The Eurozone’s PMI Composite “Flash” decreased further from July, but still holds in expansion territory at 52.8 (Markit). This continued European weakness definitely causes concern about the continued viability of the emergence of Europe from extended recession.
- The faltering Japanese economy is in need of a kick-start. The International Monetary Fund, in a report released Friday, emphatically cited the need for Japan to promote structural reforms quickly after the country’s gross domestic product in April-June suffered the worst contraction in 13 quarters.
- Gluskin Sheff’s David Rosenberg summarized the global economic view this way: “The Eurozone is perilously close to recession… The once-hot UK economy seems to have peaked… Japan is suffering… China is slowing down deliberately… (And in the U.S.) there actually has been tremendous income growth… There are a tremendous number of cross currents…”
Equities Outlook: Most of the U.S. Indicators Flashing Green
- The S&P 500 Index now stands at a gain of now more than 9.0% for the year. In addition, the Russell 2000 Index of small stocks has returned to positive territory. Emerging markets, which have enjoyed a rebound, are up about 10.0% so far in 2014.
- Corporate earnings for the second quarter of 2014 are running considerably ahead of expectations. 68% of companies that reported have beaten analyst’s expectations. Year-over-year growth is +8.4%, an impressive pace.
- While the equity market is sporting record levels, markets generally do not start turning over into a Bear Market unless is recession is in the near future – typically within six months. Based on the most recent economic data releases, particularly the Leading Indicators mentioned above, a near term recession looks highly unlikely.
- Technical indicators we follow remain in the bullish camp. There do not appear to be significant signs of investors selling stocks at market highs. There is actually good consistency among the indices of the various market segments, confirming what we judge to be the underlying momentum of the equity markets.
Fixed Income Markets: Rates – Now and in The Future
- The Ten-Year U.S. Treasury yield edged higher to close the week at 2.4%. The yield had dropped as low as 2.34% on fears that lower rates on competing European sovereign debt would pull down U.S. yields as well. The strong U.S. economic data last week, tempered some of those concerns.
- Some risk appetite is coming back into the bond market. U.S. junk bond funds had positive fund flows for the second week in a row, taking in $2.2 billion last week. This is the highest level for 2014.
- In the most recent release of minutes from the Fed’s Open Market Committee (late July), there seems an increasing hawkish tilt. A notable quote: “Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated…” The question is when the Fed will move away from its long-followed “zero interest rate policy (ZIRP)”.
- While an upward move in rates is likely to occur sometime in 2015, our view is that the initial moves upward in rates away from zero can be tolerated by the economy without creating significant risk of economic slowing or recession.
The Week Ahead
- New Home Sales (Dept of Commerce)
- Case Shiller Home Price Index (S&P, Case Shiller)
- Consumer Confidence (Conference Board)
- GDP 2nd Estimate (BEA)
- Corporate Profits (BEA)
- Consumer Sentiment (University of Michigan)