ECONOMIC OUTLOOK: Parsing the Data, to Start the New Year
- 4th quarter U.S. GDP was released on Friday, and despite slightly missing expectations, overall it was a solid report. Growth came in at a 2.6 percent annual rate. Consumer spending was a particularly strong component, growing 3.8 percent. Chief Investment Officer, Ryan Patterson, CFA noted that residential and business investment were impressive as well, up 11.6 percent and 6.8 percent. Trade and declining inventory build were both slight negatives in the quarter.
- After only a few days of shutdown, the government reopened on Tuesday. At least for another two weeks anyway, until February 8th. As we’ve mentioned before, stock markets don’t typically pay much attention to government shutdowns, and the same held true this go around.
- The Conference Board’s Leading Indicators, designed to forecast growth six months forward, increased 0.6 percent in December. These indicators have almost always turned reliably negative before a recession, so the current release continues to support our conclusion that recession doesn’t appear to be a big risk near-term.
- Committee Chair, Walter Christopherson, noted that the one blemish in the week’s data releases was housing data. Existing and new home sales fell 3.6 percent and 9.3 percent, respectively. In both cases, a shortage of supply was cited as a headwind. While the declines broke a stretch of generally positive housing reports, both existing and new home sales are relatively close to recovery highs.
- Despite the fact that the government reopened, stock markets advanced, and economic data was mostly upbeat, the U.S. dollar continued to weaken. In fact, the dollar hit a three year low versus a basket of global currencies. The proximate cause for the recent dip was likely Treasury Secretary Steve Mnuchin’s recent statement, claiming that a weaker dollar is good as far as “trade and opportunities” for the U.S.
- Walter pointed out that a number of other factors are likely responsible for the longer-term trend, including better than expected growth out of emerging markets, and no further interest rate cuts from developed world central banks including the European Central Bank and the Bank of Japan.
- While the U.K.’s decision to leave the European Union is still a major uncertainty, it appears to merely have slowed economic growth, not outright halted it. The U.K. economy grew at a somewhat reduced, yet still respectable 1.5 percent for all of 2017.
EQUITY MARKETS: In a word, “Good”
- For global stock markets, January has been, in a word – good. Markets ended 2017 with strong momentum, and that has carried on through the beginning of this year. The S&P 500 is already up 7.55 percent thus far in January, led by the consumer and healthcare sectors which have posted double digit returns.
- Given that corporate tax cuts weren’t passed until very late last year, it looks like analysts are now showing more confidence in raising their earnings forecasts. They are, in effect, playing catch up as the uncertainty surrounding the final legislation now that the future course has become clearer.
- Our equity analyst, Corbin Grillo, pointed out that this is now the 4th best start to a year ever, trailing only 1967, 1976, and 1987. Each of the previous three experienced positive total returns for the entire year. He shared a bit of market history: when the S&P 500 has a net positive gain in the first five trading days of the year, there is about an 86 percent chance that the stock market will rise for the full calendar year.
- The S&P 500 has gone a whopping 400 trading days without so much as a 5 percent correction. Should that be cause for worry? Don’t worry just yet; the last time this happened was from 1995 to mid-1996, and the bull market still had three years left to go.
- The aforementioned weaker dollar has had a positive effect on emerging market stocks, which are up nearly 10 percent so far.
FIXED INCOME MARKETS and the FED: What Does a Bear Market in Bonds Look Like?
- Ray Dalio, founder of the world’s biggest hedge fund, Bridgewater Associates, was the latest well-known investor to opine on the near-term outlook for bond markets. Like former PIMCO star manager, Bill Gross, Mr. Dalio thinks we are likely in store for a bear market in fixed income.
- But like Mr. Gross, he really didn’t define his terms. Just what exactly, would a bear market in bonds entail? Well, over the past 40 years, the worst calendar year for investment grade bond returns was 1994, when they were down, in aggregate, just shy of 3 percent. Yes, the absolute worst year in more than 4 decades and bonds lost less than 3 percent.
- Now, certainly with interest rates this low, there is without doubt a mathematical potential for losses in bond prices. But keep in mind that poor years for bond markets don’t come close to the worst for stocks. So perhaps a term other than “bear market” ought to be used. (“Bear Cub Market”?)
- As the dollar weakens and stocks continue to advance, bond yields have ticked up around the world. The 10-Year U.S. Treasury yield is at a 4-year high, but the actual number is still a relatively low reading of 2.66 percent.
THE WEEK AHEAD:
- U.S., Personal Income and Outlays (BEA)
- U.S., S&P Case Shiller Home Price Index
- U.S., Conference Board Consumer Confidence
- Eurozone, GDP (Eurostat)
- U.S., ADP Employment Report
- Eurozone, Unemployment (Eurostat)
- U.S., Car Sales (Autodata)
- U.S., ISM Manufacturing Index
- U.S., Construction Spending (Census)
- Eurozone, PMI Manufacturing (Market)
- U.S., Employment Report (BLS)