Market Insights: June 16, 2014
Economic Outlook: Small Business Joins In…
- The NFIB Small Business Optimism Index improved to 96.6 last week, which represents its best reading of the recovery since beginning in 2009.
- The biggest gains in the Small Business Survey came from those anticipating improvement in the economy. The second highest metric was an improvement in sales expectations. This is encouraging as a top-line metric.
- Rising tax receipts together with cuts in defense spending continue to trim down the government’s debt which, eight months into the government’s fiscal year, has declined on a year-over-year basis by more than 30.0%. Declines in borrowing needs by the Federal government take some pressure off of the fixed income markets, since this represents a lower supply of new bonds.
- Retail Sales were up a bit less than anticipated in May (+0.30%), but the April data was revised up to +0.40% from an original flat reading [Dept of Commerce].
- The University of Michigan Consumer Sentiment reading dropped slightly to 81.2 last week from the 81.9 reading we saw last month.
- European Union Industrial Production has a nice bounce in April, up 0.80%, but the year-over-year reading is modest, showing only 1.40% growth [Euro Stat].
Equities Outlook: 30+ months without a correction…
- The conflict in Iraq seems to be escalating as various organizations vie for control of certain cities. Oil prices jumped a bit on the news, but stocks don’t seem much affected at this point. If there continues to be pressure on oil prices, it could revive other parts of the commodity complex.
- The past month has witnessed a rally in more growth-oriented stocks, and the spread between Russell 1000 Value (+6.48% YTD) and Russell 1000 Growth (+4.43% YTD) has narrowed to around 2.0%, from a much wider disparity earlier in 2014.
- The S&P 500 is now up over 5.0% on a year-to-date basis as of last week. We may see a bit of profit-taking as the market has now gone over 30 months without a 10.0% or greater correction (the historical average is every 18 months). Whether any profit-taking amounts to a correction will be a matter of wait and see.
- There were no significant market moving events last week. China and Russia’s stock markets continue to recover after starting off the year poorly.
- In fact, the MSCI Emerging Markets Index has rebounded to occupy the top spot over both domestic and foreign developed markets as the top performing major index this year.
The Fed and Fixed Income Markets: Bond rally or bubble?
- The Ten-Year Treasury rebounded in yield last week. It had closed the previous week at a yield of 2.59%, rebounding from below the 2.50% level the previous week. It has opened this week at the same level, with a yield at 2.59%, as we write this Monday morning.
- We felt the yields below 2.5% were unsustainable. While a week does not constitute a trend, the bond rally may be over for now.
- Clients are asking often if the move in stock prices represent a “bubble.” We’ve commented that we do not regard the equity market as being in bubble status. Dave Rosenberg [Gluskin Shelf] uses more than one standard deviation from historical norms as his criteria for bubble status. Using this definition, the Fed Funds rate represents a bubble, suggesting that the greater danger of bubble status is in the bond market, not equities.
- That said, bonds are likely nonetheless benefiting in the short term from a modest “flight-to-safety” bid based on the increasingly violent conflict in Iraq that has, to a degree, destabilized the oil market in the Middle East.
The Week Ahead
- Industrial Production (Federal Reserve Board of Governors)
- CPI (BLS)
- Housing Starts (Census, Dept of Commerce, HUD)
- FOMC Meeting Announcement
- U.S., Leading Indicators, Conference Board