Economic Outlook: On the One Hand
- Data releases last week bring to mind the old joke about how you can line all the economists in the world end-to-end, and they would not reach a conclusion.
- The recent economic data releases are definitely somewhat more mixed than previous weeks. On the one hand, the Small Business Optimism Index surged to 100.4 in December. It has not been this high since October of 2006. The wage component of the small business survey also reached a new high for the current cycle.
- On the other hand, retail sales reports were a bit disappointing for December. The Department of Commerce reported that retail sales (including autos and gasoline) showed a decline of 0.3%. Obviously lower gasoline prices had some impact on those numbers.
- Initial jobless claims jumped up close to the 300,000 level in the most recent week. However, the trend line on jobless claims is still in a decidedly positive downward direction. At year end, the Household Survey revealed that full-time employment in the U.S. rose to 120 million. We have not seen those levels since the middle of 2008. Part-time employment averaged 27.5 million during 2014. This data conflicts with the popular perception that the U.S. economy is only creating part-time jobs.
- The inflation numbers are definitely exhibiting a softening pattern. This primarily reflects the effect of lower oil prices showing up in the inflation numbers. The consumer price index for the year ending December 31, 2014 is up only 0.7%. However, when the effects of softer energy prices are removed, the CPI increased 1.6%.
- Despite the weaker retail sales report, the Consumer Sentiment Index (University of Michigan) rose to 98.2. This is the highest level in 10 years. Apparently, folks feel good filling up at the pump and paying lower gasoline prices.
- On Thursday, the price of oil fell to a low for the last five and a half years, before rebounding on Friday. Goldman Sachs released a report last week which indicated that their analysts call for the price of crude to stay lower for a longer period of time than previously expected in order to re-balance the global market. Goldman sees Brent crude prices averaging $50.40 per barrel in 2015.
- Other analysts whom we follow in the Investment Committee predict a rebound of oil prices to $50 to $60 in 2015, as these reduced prices gradually depress output of oil and simultaneously stimulate demand. The U.S. rig count declined at the end of 2014, and we certainly expect that this trend will continue for a while. As we’ve been discussing in Investment Committee, lower prices produce more winners, however, than losers. The global economy in particular is one of the winners.
- In their most recent report, Strategas reported that their measurement of Chinese exports rose in 2014 by 7.0% on a year-over-year basis. This is an encouraging reversal in direction for Chinese exports, and might be a signal that global growth has bottomed and is turning the corner.
- According to Europe’s top court in a recently-announced decision, the ECB can legally buy sovereign debt. This clarifies one point of uncertainty regarded the expected announcement of Quantitative Easing measures in the Euro-zone. We might get an announcement on QE measures in Europe later in the week.
- Industrial production in the European Union rose 0.2% in the reported November numbers, which were just posted by EuroStat. This represents the third month in a row of increases for production in the Euro-zone.
Equities Outlook: Shifting Sands & Making Forecasts
- For all the talk about the market’s difficulties, so far in 2015, the S&P 500 Index is less than 3.0% below its peak reached near the end of 2014.
- Stocks rebounded at the end of last week, driven partly by the strong Small Business survey and the increasing feeling that the Federal Reserve is not in a hurry to begin increasing interest rates.
- Earnings forecasts for fourth quarter final numbers have been pulled in as analysts take into account the effects on earlier forecasts of declining energy prices. It is possible that final reported earnings for S&P 500 companies will come in below the Q3 numbers, but still will likely end 4.0% – 5.0% ahead of the year-earlier results.
- Earnings growth rates for 2015 are now forecasted by analysts to come in at 6.0% – 7.0% for blue chip U.S. companies and 10%+ for smaller and mid-cap companies. These rates are sufficient to support further moves in stock prices, but perhaps more of the single digit variety.
Fixed Income Markets: Eavesdropping on the Conversations of Fed Members
- Everyone assumes the Fed will start tightening rates at mid-year, right? In recent speeches, several of the Federal Reserve Board members have expressed caution about the speed with which the Fed should begin the process of raising short-term interest rates.
- Board Member Dennis Lockhart stated recently in an interview that he expected “that the argument pro and con for lifting off rates will probably be a close call.” Lockhart said last month in a speech that the Fed “would introduce the theme of patience with regards to rate increases when it releases its minutes from the next meeting.” Bond yields have been heading lower as a result of remarks like this and an increasing market belief that interest rate increases will be perhaps delayed and certainly protracted in any upward ascent.
- The interest rate on the ten-year U.S. Treasury Note ended last week lower still at 1.84% on Friday. This is a further decline from where it closed the previous week at a yield of 1.94%.
The Week Ahead
- U.S. Holiday
- U.S. Housing Market Index (NAHB)
- U.S. Housing Starts
- U.S. PMI Manufacturing “Flash” Index (Markit)
- European Union, PMI Composite “Flash” (Markit)
- ECB announcement (Possible QE Moves)
- U.S. Existing Home Sales