Market Insights: March 10, 2014
Economic Outlook: Encouraging numbers looking ahead…
- While the U.S. economy may be in a soft spot, we judge the potential GDP growth in 2014 to be 2.5% or better. That is not a boom, of course, but it is steady growth.
- 2014 has admittedly started slow, but this is very likely weather-induced, which means a bounce-back due to some pent-up demand is likely in the second quarter. We do not see this soft patch as portending recession or as a reason to “hunker down” in one’s portfolio.
- Friday’s Jobs Report for February reported an increase of 175,000 jobs, which was a surprise to the upside, compared to expectations. More Americans started looking for jobs, so the unemployment rate actually ticked slightly higher from 6.6% to 6.7%. Professional and business service jobs (white collar) led the way. Average hourly earnings were up 0.4% for the month.
- Some highlights from Personal Income and Outlays report [BEA]. Personal Income was solid, up 0.3% in January and +4.1%, year-over-year. Consumer Spending was positive as well, up 0.4% in January and +3.5% year-over-year.
- The ISM Manufacturing Index for the U.S. increased as well, reading 53.2 for February after a softer 51.3 showing in January (ISM). ISM’s non-manufacturing index for the U.S. was somewhat weaker, however, reading only 51.6, still on the growth side, however.
- Looking beyond the U.S., the story improves. JP Morgan Global PMI Manufacturing Index comes in at 53.3. An informal confirmation from the “Aussie Indicator”.
- Australia is often considered a barometer for the direction of the global developing economy due to its heavy orientation to natural resources. A few positive signs from the Aussies suggest a bottoming in the emerging global economy. Retail sales substantially surprised to the upside in January. The trade surplus widened dramatically. The Aussie dollar has been showing signs of firming. Q4 GDP growth is reported at a strong 3.4%.
- The year-over-year uptick in U.K. home prices topped 10%, confirming the continued strong growth environment in the U.K.
- Even for poster child Greece, the manufacturing index number has posted in the growth column at 51.3, pretty encouraging for such a beleaguered region.
Equities Outlook: The best opportunities may be abroad…
- Growth in Europe has switched from negative to positive. This has positive implications on corporate profit growth in the region, and suggests an improving environment for equities.
- We are not the only ones who think so. With dividends on European equities already higher than U.S. stocks, 8-10% profit growth with even modest expansion in multiples on cheaper European stocks could easily drive 15%-type returns in the next 12-18 months. [Anthony Chan, Chief Economist, J.P. Morgan Chase Private Wealth Management, on Bloomberg Radio last week]
- Foreign equity markets even carry geopolitical muscle. The Ukraine tension reached an acute point last week and Russian President Putin decided to re-assure markets by saying he did not want to harm his “brothers” in the Ukraine. Russia’s equity market prices declined more than 15% prior to his comments and have bounced back since.
- The peripheral European markets continue to confirm the turn-around story there. Yield spreads on government debt for peripheral countries (Spain, etc.) have narrowed significantly. Spanish Government Ten-Year Bonds at 3.4%, are now at a 10-year low. Some trivia for your next cocktail party bet: The Spanish equity market has actually out-performed the strong U.S. equity market over the trailing 12 months.
The Fed and Fixed Income Markets: Thoughtful and nimble…
- The Ten-Year Treasury rebounded in yield last week, on new conviction that the growth story is intact. At week’s end, it closed at a yield of 2.79%, up about 17 basis points from the previous week.
- As we’ve talked about since the middle of last year, the challenge for fixed income investors is duration and the likely upward direction of interest rates. We continue to believe that yield investors need to be flexible in their thinking about where to find yield.
- That said, the yield spread for some alternative areas like high yield junk bonds has narrowed at the same time the flow of funds into these areas has picked up. A thoughtful and nimble approach to this area is important. Investors should not be buying in these tactical sectors of fixed income market and putting their buys away in the drawer to be forgotten.
- An important area for bond investors to watch is any pressure building in the inflation numbers. While we are not predicting any near-term breakout, there are some trends evident in the wage data which suggest that wage pressures could begin to build.
- More than 30 states are raising the minimum wage. About one-third of the sectors in the U.S. labor market are considered to be at full employment status. These factors could begin to affect inflationary pressures and therefore interest rates in the next year or two.
The Week Ahead:
- Small Business Optimism Index (NFIB)
- Industrial Production (Eurostat), [EU]
- Industrial Production (National Bureau of Statistics), [China]
- Retail Sales (National Bureau of Statistics), [China]
- Retail Sales Report (Census, Dept of Commerce), [U.S.]
- University of Michigan Consumer Sentiment Survey