Market Insights

Market Insights: February 17, 2015

Economic Outlook:  The Good Old Days?

  • Despite the recent hand-wringing about lower oil prices undermining jobs growth, last Friday’s employment report was remarkably strong. What was shocking: the revisions announced to previous months’ data.
  • November’s new jobs number was revised up by 70,000 (this is the second positive change to the original number). November’s fully revised job gain number now stands at more than 400,000 jobs. This is a monthly number like “the good old days”.
  • The December data was also adjusted upwards and stands at more than 300,000. With the revisions presently in place, 2014 was the best year for job gains since the turn of the Millenium.
  • The unemployment rate is masking some of this change because the strength in the jobs market is bringing more people back into the market. Some of those who dropped out of the labor force have decided to drop back in. Most of the job gains are in private payrolls, which rose more than 3 million last year.
  • All of these job gains mean more money in the hands of consumers who can spend those earnings on goods and services. Auto sales have been running at a rate of about 17 million for the last half year, and is one sign reflecting this strength. The retail sales report showed that spending at restaurants has risen 13.0% from year-ago levels.
  • Oil prices have rallied in the past two to three weeks. Brent crude prices broke above $60 last week, a first for 2015. We were predicting these levels by the end of 2015, but this is happening much quicker than we expected. We will see if it proves to be short-term.
  • The Euro-zone economy is also showing some encouraging signs of edging further into the growth column, although the headline attention surrounding Greece has obscured attention to this data.
  • German factory orders have come in strong for December and industrial production rose for the month. Some analysts have commented that this is simply attributable to Euro weakness making German exports cheaper. However, if you examine the underlying data, most new orders relate to sales to other Euro-zone economies, which is evidence of the improving strength.
  • Here’s a surprising comparison: German real GDP (adjusted for inflation) accelerated at a rate (3% annualized) that exceeded the U.S. in the fourth quarter of 2014. This growth rate far exceeded analysts’ expectations.
  • December retail sales show that the year-over-year change for the Euro-zone as a whole was 2.8%. This makes last year the strongest since 2007.

Equities Outlook:  Could the Tide Be Turning?

  • The forward P/E ratio on the U.S. stock market (S&P 500) is now about 16.8. While this is not excessive, it is also not cheap. Global investors who are seeking cheap stocks are increasingly likely to look outside the U.S. The same measurement for foreign markets is considerably lower. Emerging markets are at a forward P/E of around 11. Even a developed market like Germany (where growth is picking up) is at around 14, and most of the Euro-zone economies are in the 14s.
  • From a technical standpoint, the U.S. market (S&P 500) is trading above its 50-day and 200-day moving average. Only a few sectors (Telecom, Utilities and Energy) are exceptions.
  • For the equity investors with a medium to long term horizon, there are a wealth of established names that are continuing to show consistent increases to dividend payments.
  • Here are a number of recent announcements for U.S. Blue Chips that are double-digit or close to it: Coca-Cola (+12%), Cisco Systems (+10.5%), UPS (+9%), Dominion Resources (+7.9%). The L&W target list of 45-50 dividend names saw increases on 89% of the stocks last year and the average increase was more than 10%.
  • Foreign equities are moving up smartly in Europe, but it is not readily apparent because of the decline of the Euro relative to the Dollar. The EMU MSCI stock price index is up more than 20% from last October for the investor holding Euros. However, those Euros are down about 19% during the same time frame, meaning the dollar-denominated investor is not noticing much of a move.
  • Could the tide now turn? European equities are up only about ½ the gain seen on U.S. stocks since 2009, and even this percentage is measured in Euros, not Dollars. One of the major differences is that the U.S. Federal Reserve has implemented major stimulus in the form of Quantitative Easing. Beginning in March, the ECB’s own QE program will kick into full speed.
  • And the Euro has gained in value for the past three weeks in a row.

Fixed Income Markets:  A Little Help From Our Friends

  • The interest rate on the 10-year U.S. Treasury Note ended last week at 2.05% on Friday. This is a further rise that follows through on the past two to three weeks. Last week’s closing yield was 1.89% and three weeks ago, we were at a low of 1.80%.
  • Given the growth posted by the U.S. economy over the past year, it is somewhat illogical that the 10-year treasury trades at these levels. Based on economics alone, it would be more reasonable to assume a level above 3.0%.
  • So what gives? At last week’s Treasury auction, 60.0% of the bonds were bought by “indirect bidders”. This really means foreign central banks are buying these bonds for their yield and for the strong dollar. This 60.0% participation has held rates down and represents an import of Europe and Asia’s lower yields into the U.S. to help hold down rates.

The Week Ahead


  • U.S., Housing Starts (Department of Commerce)
  • U.S., Industrial Production, January (Federal Reserve)


  • U.S., Initial Jobless Claims
  • U.S., Leading Economic Indicators