Economic Outlook: All the News That Is Not Seen Fit To Print
- If we can borrow and slightly manipulate the 100 year-old tagline for The New York Times, last week was a week for headlines that you probably did not see.
- The mainstream financial media was preoccupied with the minute-by-minute moves in the equity market and the talk shows were filled with the message of gloom and doom. Meanwhile, there were a few stories that likely did not hit most people’s radar screens.
- First, for all the talk about gloom and doom, the U.S. equity market, S&P 500 Index, closed up about 1.0% from the previous Friday. For all the hand-wringing, the U.S. market is down about 2.0% year-to-date. Foreign developed markets are down about 1.0%. More on that below, as we will stick with the missing economic headlines here.
- U.S. New Home Sales rose 5.4% last month over the previous one (Census, Commerce Dept.) This is one more positive report from the housing sector to several we’ve commented about.
- Durable Goods Orders posted a strong monthly reading for the second month in a row. We saw both a 2.0% jump in July on top of an upward revision to the June data.
- It has captured remarkably little attention, but the revisions to Q2 GDP have now risen to 3.7% annual growth.
- The positive economic data is not simply a U.S. phenomenon. The Economic Sentiment Index for the Euro-zone ticked higher in August, despite all the distraction from a volatile equity market.
- Italian Consumer Confidence spiked up in August from the reading recorded in July.
- Spain’s retail sales number is now sitting more than 4.0% higher than year-ago.
- Just to complete the picture from the soft underbelly of the Euro-zone, even lowly Greece had a 0.9% expansion in GDP for the second quarter. This is Greece’s best measure in 7 years.
- The economic strengthening is not confined to the Euro-zone. Japanese unemployment is now at below 3.5%. Just for perspective, this is a level we have not attained in the U.S. since the early 1950’s. Japanese workers’ real, inflation-adjusted income is now more than 5.0% higher than one year ago.
Equity Markets: The Good News and the Bad News
- “I agree with your generally positive view on equities. When I see a 10.0% market correction, I’ll commit some cash…” We’ve heard different versions of this statement countless times from clients in conversations since early 2013.
- The good news: Investors waiting for the chance to enter at 10.0% below the high finally got their chance last week.
- The bad news: that entry window only lasted 5 hours and 30 minutes. The U.S. equity market traded 10.0% or more off its high from last May for several hours last Monday and again several hours on Tuesday. As we finished last week, we have now rebounded to about 6.0% below the highs of last May.
- We may of course see further volatility and perhaps there will be other opportunities to enter at a 10.0% or better discount. Time will tell. However, the quick rebound in the equity market is a reminder of the inherent difficulty associated with such attempts at market timing.
- The nimble investor who managed to buy at 10.0% off the May highs during last week’s 5-1/2 hour window will of course enjoy a 10.0% return on capital if the market returns to that previous high.
- The irony? Any investor who committed their equity funds 12 months or more prior to last May’s high has enjoyed a higher return than that nimble market timer. Even investors committing as late as January of 2015 are only marginally worse off than the nimble market timer.
- What is the moral of this story? Equity strategies are inherently a long-term play and should be based on values. Make decisions to invest capital for the long-term if the basic value equation (cash flows, dividends, price multiples) is sensible. The S&P 500 is now trading between 15 and 16 times forward earnings. There are a number of high quality stocks that yield 3.0% or more in dividends. Don’t worry greatly about a pull-back in price if you’re committing capital at reasonable multiples.
Fixed Income Markets: Stay Tuned
- Last week saw considerable movement in the yield on the 10 Year Treasury note as investors reacted to volatility in equity markets. No real surprise there. The yield on the 10 Year closed at 2.18%. This is higher than where it closed the previous week at 2.05%. At one point on an intra-day basis, the 10 Year traded at a yield below the 2.0% level.
- Despite all the turmoil in recent weeks regarding emerging markets, emerging market bonds (hard dollar currency at least) have held up pretty darn well, and actually gained money during last week
- This suggests to us that there may not be a full blown emerging markets crisis on the horizon. Stay tuned.
The Week Ahead
- EU, PMI Manufacturing (Markit)
- U.S., PMI Manufacturing (Markit)
- U.S., ISM Manufacturing (ISM)
- U.S., ADP Employment (ADP)
- EU, PMI Composite (Markit)
- EU, Retail Sales (Eurostat)
- U.S., ISM Services (ISM)
- U.S., Employment Report (BLS)