Market Insights

Market Insights: March 23, 2014

Economic Outlook:  Some Spotty Numbers.

  • “It is a capital mistake to theorize before one has data.” – Sherlock Holmes, A Study in Scarlett (Arthur Conan Doyle). We get new data on the economy every week. It has been almost uniformly positive, but we have to acknowledge there are a few contrary signs evident that cannot be dismissed.
  • First, the Fed’s Regional business surveys have been solid this month. The Empire State Survey of General Business Conditions (New York Fed Bank) came in at 6.9 and the Philadelphia Fed Business Outlook Survey (Philadelphia Fed Bank) came in at 5.0. However, while both surveys point to moderate expansion, weakening in new order data may suggest that the stronger dollar and consistently low oil prices are exerting some negatives on future outlook.
  • Industrial Production most recently posted on the soft side, increasing only 0.1% in February and capacity utilization moved lower (Federal Reserve Board of Governors).
  • Housing Starts dropped significantly in February, to a 0.897 million annual pace from 1.081 million in January (Census, Dept of Commerce, HUD). Poor weather could account for some of this decline and if things go like last year, we could see a rebound in Spring and Summer.
  • Despite these two soft stats, the Conference Board’s Index of Leading Indicators increased 0.2%, pointing to a positive growth trend over the next 6 months.
  • We talked a lot last week about the improving numbers in Europe. Following last month’s surprisingly upbeat results, the most recent monthly German ZEW survey signaled a further increase in analysts’ confidence in the German economy.
  • This improvement in sentiment reflects optimism about the potential combined effects of QE, low oil prices and the decline in the value of the euro, which will help exports. Angela Merkel and Alexis Tsipras (Greece) met Thursday evening and are apparently closer to finding common ground on Greece’s bailout term. Markets seemed to like this and responded very favorably on Friday morning.

Equities Outlook:  Are Equities the Place to Find Yield?

  • One of our favorite research sources is Strategas. They recently released a rather interesting chart comparing the dividend yield on various stock market indices vs the yield on local 10-Year Treasury Bonds.
  • 41% of S&P 500 stocks have a greater yield than the 10-Year Treasury Bond. 88% of FTSE 100 (UK) stocks have a greater yield than local 10-Year Treasury Bond.
  • Across the channel, 100% of DAX (German) stocks have a greater yield than local 10-Year Treasury Bond. 100% of CAC (France) stocks have a greater yield than local 10-Year Treasury Bond.
  • 96% of Nikkei (Japan) stocks have a greater yield than local 10-Year Treasury Bond.
  • The Fed noted in their release last week that economic growth in the U.S. has moderated. Because this takes a bit of pressure off to increase rates, pretty much all equity markets responded favorably to the Fed announcement. Maybe the fact that the Fed lowered some projections for GDP growth and estimates of the Fed funds rates were liked by the market.
  • At last week’s end, the S&P 500 stood at about a 2.5% total return for the year, while foreign stocks (EAFE) are closer to +6.0% on the year.

Fixed Income Markets:  Less Patience? And Lower Rates?

  • Friday, the Fed eliminated the word “patient” regarding when rates begin to rise. There was no change in policy rates. But the Fed changed its characterization of the economy. Growth is no longer “solid” as noted in January but “economic growth has moderated somewhat.” The statement is somewhat dovish.
  • The Fed was a little positive about the labor market. “A range of labor market indicators suggests that underutilization of labor resources continues to diminish.”
  • The Fed lowered its forecasts for the unemployment rate but also for GDP growth and inflation. The Fed appears to either be willing to accept lower unemployment or acknowledge that labor force participation is declining. The lower GDP and inflation number support the Fed’s dovish statement today.
  • The emphasis has to be data dependency. Recent indicators have softened as noted in the statement. While the unemployment rate has declined to 5.5%, wages are still soft-for production workers (up only 1.6%on a year-on-year basis).
  • PCE inflation on a year ago basis is up only 0.2%. Core PCE inflation on a year-ago basis is up only 1.3%.
  • We spoke last week about the reversal in direction of yield on the 10-Year Treasury Note. That continued last week, as the yield on the 10-Year closed at 1.92%, off significantly from the previous week’s level of 2.11%.

The Week Ahead


  • U.S., Existing Home Sales (National Association of Realtors)


  • U.S., CPI (BLS)
  • U.S., PMI Manufacturing Flash (Markit)
  • EU, PMI Composite Flash (Markit)
  • U.S., New Home Sales (Census, Dept of Commerce, HUD)


  • U.S., Durable Goods Orders (Census, Dept of Commerce)
  • Germany, IFO Survey (IFO)


  • U.S., Final GDP Estimate (BEA)
  • U.S., University of Michigan Consumer Sentiment