Market Insights: February 3, 2014
Economic Outlook: Look at the data, not the headlines…
- Inflation remains low. The Core PCE price index, the Fed’s preferred inflation measure rose 0.1% month-to-month in December, and only 1.2% for 2013 as a whole. [BEA]
- The Conference Board’s Consumer Confidence Indicator beats expectations rising to 80.7. Clients speak to us about all their anxiety over the economy, but it is not showing up in average spending behavior. Watch what people do, not what they say.
- On that front, Consumer Spending increased 0.4% month-to-month in December per the Bureau of Economic Analysis.
- Some of the news on the housing front is mixed, however, suggesting that the recovery in housing may be moderating. New Home Sales data decreased to a 414,000 annual rate according to the Commerce Department. And the Pending Home Sales Index declined 8.7% in December [National Association of Realtors].
- When you put it all together, the first estimate for GDP in Q4 came in at a robust +3.2%, even in the face of government spending declining 0.9%. There will of course be some revisions to this in coming weeks. We will see how well this holds up. But on balance, most of the data is positive.
- Markit reported that the Eurozone’s flash measurement of manufacturing, M-PMI, increased to 53.9 during January. This is the highest reading since the first half of 2011, suggesting that the growth trend has some legs.
- The reading on GDP in the U.K. came in at +2.8% for 2013. And the European Union Economic Sentiment Gauge reached 100.9 in January, again a high point for the past 3 years.
Equities Outlook: Looking past the current dust storm…
- We’ve written often in the past 3 months about the possibility of a market correction despite our generally positive view on the opportunities for equities over the next several years. January has been a bit of a rough start for the year in the market: about a 4%-5% decline, largely related to fears over emerging markets.
- Could this be the correction? Sure, only time will tell. Should you “do something?” Not unless you are trying to make money on short-term trading. The fundamentals for the next few years remain attractive. Historically, it is pretty normal for the market to experience profit-taking when there is a new leader taking over at the Federal Reserve.
- An interesting historical perspective: “…in the context of economic expansion, we have seen no fewer than 16 periods in the past six decades when we have seen a 10% correction or more and life goes on.” [David Rosenberg of Gluskin Shelf Research in his daily comments last Thursday.]
- Again, however, the data looks solid. 70% of the S&P 500 companies that have reported Q4 earnings have exceeded analyst’s estimates. On average, these reporting companies have earnings that are 15% above the year-ago figures and importantly, with gains in top line revenue.
- However, the good news on earnings is largely being ignored by investors in January. Apparently, they prefer to focus on Emerging Market fears.
The Fed and Fixed Income Markets: Municipals have rallied, but do your homework…
- The Ten-Year Treasury drifted still lower last week. At week’s end, it closed at a yield of 2.70%, down from the previous week’s 2.72%.
- While the difficulties of the equity market have captured the headlines, there has been a huge rally in bonds during January. Balanced portfolios have gotten a lift from the fixed income side.
- The rally in bonds has extended to Municipal bonds, with some AAA-rated yields dipping below Treasury yields for the first time in a long time. Does this suggest that one can throw caution to the wind on municipal bonds? No.
- The big problem areas in municipal bonds are well publicized: Detroit, Puerto Rico, Illinois. We believe the key for municipal bond investors is not to invest based on ratings alone. Ratings become stale very quickly and the underlying trends are important. Research is crucial.
The Week Ahead:
- ISM MFG Index (Institute for Supply Management) [U.S.]
- Factory Orders (Census, Dept. of Commerce) [U.S.]
- PMI Composite [China]
- ADP Employment Report [U.S.]
- Employment Report [U.S.]