Market Insights: December 16, 2013
Economic Outlook: Are the clouds parting in Washington?
- A couple of survey results last week showing some increased optimism. The Small Business Optimism Index rose to 92.5 [National Federation of Independent Businesses]. In addition, the CFO Economic Outlook survey showed an economic strength assessment of 53 compared to 49 a year ago [Bank of America Merrill Lynch 2014 CFO Outlook Survey].
- Moreover, 47.0% of CFOs expect the economy to expand in 2014, a considerable increase from the 39.0% making the same prediction a year ago. Only 12.0% expect the economy to shrink.
- Retail sales were positive, with sales increasing 0.70% month-over-month in November [Bureau of the Census].
- Inflation data continues to be tame. The Producer Price Index actually declined 0.10% in November and stands only 0.70% higher than one year ago.
- We’ve been talking in recent months about the generally stronger housing numbers. The Federal Reserve Funds Flow report just released showed that American household wealth hit a nominal level of $77.3 trillion in Q3, which is a new record. This was impacted mostly by better housing numbers.
- The House of Representatives passed by a large majority last Thursday a budget compromise that was negotiated by Paul Ryan and Patty Murray. Compared to most of the recent agreements regarding budgetary matters, this budget blueprint actually creates a framework that extends out two years (that is “long-term” in political circles). Passage by the Senate awaits and the White House has signaled support for signing legislation.
- The detailed provisions would not really pass our own wealth management screens as constituting sound financial planning, but any agreement that might introduce near-term certainty and fiscal clarity for U.S. business regarding what the rules will be is a decided plus for economic growth, regardless of its imperfections.
- Retail sales in China were up 1.32% in November and are up a strong 13.7% from one year ago, suggesting that fears of a hard landing in China were probably over-blown. [National Bureau of Statistics of China]
- We talked in our last piece about the latest industrial production numbers from the Euro-zone. While they remain in the positive column, they are nonetheless below expectations, highlighting that the recovery there is certainly not what it could be. We will have to see if this is just a pause, or whether there is a risk of a double-dip in Europe. The UK, however, is a notable exception with strong growth.
Equities Outlook: The “pause that refreshes?”
- The moderate equity market weakness of the past few weeks is signaling an increased acceptance of the idea that the Fed may begin the tapering process at this week’s meeting, and if not by January 2014.
- This may be a repeat of the old adage to “buy on the rumor and sell on the news”. The market has enjoyed a great run, thanks in part to the Fed’s liberal dose of QE stimulus and the hope that the economy would improve. Now that the economy appears to be confirming improvement, we are less likely to see the strong move to the upside in stock prices.
- However, this is certainly not any sort of bear market call. Positive economic growth has rarely been accompanied by declines in stock prices. We may simply have more limited upside at this point. As you know, we have commented for several months, that a “pause” in the market’s advance would not be a surprise. The bull/bear statistics that we have talked about in recent weeks confirm that some sort of pause, even a correction, would not be unexpected.
- Earnings announcements by companies in the fourth quarter show pre-announcements which are negative out-pacing positive pre-announcements by a solid margin. And analysts have pulled in their forecasts for Q4. However, the reduction is a slowdown in earnings gains, not an actual decline.
The Fed and Fixed Income Markets: Fed talk…
- Bloomberg’s news service reported last week that 34.0% of economists surveyed now expect the Fed to start the taper of Quantitative Easing at the December meeting.
- The yield on the Ten-year Treasury has inched higher and finished last week up slightly at a yield of 2.86%. This is getting back to the higher end of the range we’ve seen since last June, suggesting that the Bond Market believes tapering is sooner rather than later.
- In a speech last week, St. Louis Fed President James Bullard essentially called for flexibility when the Fed tapers asset purchases. He sees improvement in the labor market but he also notes that inflation is low. Bullard suggested that the Fed could go slow with tapering, so long as inflation remains below target. Bullard stated that the Fed could make changes in forward guidance. He called for a chairman’s press conference at the end of every FOMC—indicating it would improve communication
- Dallas Fed President Richard Fisher said last week that the Fed should begin tapering “at the earliest opportunity”. In a speech last Monday, Fisher actually proposed that the Fed lay out publicly a programmed schedule for eliminating the $85 billion per month in QE bond purchases so that markets can anticipate clearly the pace.
The Week Ahead: A lot of data…
– U.S. Industrial Production
– U.S. CPI
– U.S. Housing Market index
– US, Housing Starts
– Fed: Bernanke Press Conference
– U.S. Existing Home Sales
– U.S. Conference Board Leading Indicators
– U.S. GDP
– U.S. Corporate Profits