Market Insights: January 6, 2014
Economic Outlook: Happy New Year?
- The outlook for 2014 looks quite positive for the U.S. based upon a review of the various gauges the regional Federal Reserve Banks report. All of them, without exception, are in positive territory. The various regional Financial Stress Indices are all sending “low stress” readings which make an economic downturn unlikely. The readings for the Texas economy are the strongest in the nation.
- The unemployment rate is likely to move into the low 6.0% range in 2014. The strength in the economy will contribute to that. In addition, the expiration of the extended unemployment insurance benefits (99 weeks) enacted in 2008 will likely force some of those with expiring benefits to take some low-paying jobs. This will force the unemployment rate down.
- The December Consumer Confidence Index closed strongly at 78.1 [The Conference Board Survey].This was well ahead of predictions and the outlook portions of the survey showed the greatest strength, which bodes well for the economy as we enter the new year.
- The PMI Manufacturing data for Europe was positive again last month, which makes six months in a row. The U.K. is very strong with PMI readings that lead all other markets in Europe.
- Even in France, not known for leading the way, auto sales posted at a level almost 10.0% over year-ago levels.
- China’s PMI manufacturing number remains in positive territory at 51, but has been somewhat stalled in this low-50’s range. Nonetheless, there is strength showing in some of the basic commodity prices, such as copper, which just hit a six-month high. This provides some confirmation that the global recovery continues. There are several other key commodities showing similar price firmness.
Equities Outlook: Out with the old and in with the new…
- The S&P 500 Stock Index closed 2013 at record levels, advancing almost 30% for the year. This is the best year since 1997. The advance was very broad-based with every sector in the index advancing.
- The year-long bullish disposition was aided by solid gains overseas as European markets climbed to record highs of their own while struggling regional economies showed some signs of life.
- The first two trading days of 2014 for U.S. stocks have started out with some profit-taking. Based on the very powerful advance of the equity market last year and particularly in the fourth quarter, some profit-taking here is not a great surprise. We will have to see if it extends itself deeper into January.
- As David Rosenberg of Gluskin Shelf Research pointed out in his letter last week, the market has begun the year many times with a negative initial trading session. However, you cannot draw any meaningful conclusion from the direction of that initial session. The market has finished the year with a positive return 33 times since 1933 after beginning with a negative inaugural session.
The Fed and Fixed Income Markets: Fed talk…
- Bond yields have picked up over the past few weeks. The Ten-Year Treasury Bond closed last week at a yield of 2.99%, after breaking the 3.0% benchmark. This increase in yields has taken place during a rise in the equity markets, a good sign of bond yields anticipating a stronger environment.
- While bond rates are rising, it is a fact that the Federal Reserve is continuing its accommodative policy. This easing is coupled with a growing and expanding economy. History tells us that bodes well for the economic outlook and likely, the market.
- Can rising bond rates mean problems for the equity market? If bond yields rise on a sustained basis, then yes, bonds become more formidable investment competition for equities. However, we are hardly to that point yet. And there are plenty of historical examples of equities continuing to do well despite rising rates.
- For now, we believe the rising differential in yield between the 2-year and 10-year Treasury yield signals a market expectation for moderate increases in inflationary pressures. This reflects the better economy and equities are likely to continue to deliver satisfactory returns in 2014.
The Week Ahead – A light week…
Tuesday: Balance of Trade [U.S. Department of Commerce]
Thursday: Initial Jobless Claims [U.S. Department of Labor]
Friday: Non-farm Payrolls [U.S. Department of Labor]