Market Insights: March 24, 2014
Economic Outlook: Weather update…
- We’ve been discussing the weather a lot in recent weeks. An update: The Empire State Manufacturing Survey of General Business Conditions increased slightly to 5.61 this month, from 4.48 in February. This is a positive forecast that expansion is continuing after some severe weather [Federal Reserve Bank of New York].
- Further confirmation from the frigid northeast: The Philadelphia Fed Survey of General Business Conditions rebounds to a +9 reading in March, following a poor, weather related, showing in February [Federal Reserve Bank of Philadelphia].
- The national Industrial Production report also rebounded after a slow January (more weather related) increasing 0.6% in February, above consensus expectations of a +0.3% [Federal Reserve release].
- Meanwhile, the inflation outlook remains cool. Core CPI reported at +0.1% in February and +1.6% for the trailing 12 months [Bureau of Labor Statistics].
- The Conference Board Index of Leading Indicators increased +0.5% in February, portending an improvement in economic conditions ahead.
- Initial Jobless Claims come in at 320,000. These numbers have been drifting down following a brief upward move beginning late last year, probably weather-induced. [Department of Labor].
- David Rosenberg of Gluskin-Shelf Research noted in his weekly comments that the Business Roundtable survey of U.S. CEO Confidence has risen in the first quarter to what is now its best reading (92.1) in 2 years.
- Euro-zone inflation has now fallen to 4 year low, increasing at only +0.7%, year-over-year, through February.
- With Euro-zone inflation remaining low, and growth still sluggish, it seems that there may be increasing pressure on the ECB to further loosen monetary policy, which would further favor our thesis that the outlook for better returns internationally is bright.
Equities Outlook: Crisis or Opportunity?
- The market has exhibited some nervousness in March over the international events in the Ukraine and the associated headline risks. In the early part of the month, we had 5 days of market sell-off with a decline of 230 points on the Dow average on March 13th.
- History is a pretty good teacher however, that generally these crisis events only exert a short-term impact on the market and that the underlying economic fundamentals are what should be watched.
- A recent summary published by Investech Research reviewed 11 global international crisis events beginning with the German invasion of France in 1940. These include events like the Cuban Missile Crisis, the Kennedy assassination, and the 9/11 terrorist attacks. In 8 of the 11 cases reviewed in the summary, the U.S. equity market was higher 6 months later. Conditions generally have a way of thawing out.
- As we discussed above, the underlying foundation of current economic fundamentals is generally favorable and we believe this continues to bode well for a market that is reasonably valued at current levels.
- Last week was a good week for domestic equities; large and small caps each advanced more than 1.0% on the week.
- From a foreign equity perspective, Japanese stocks continue to have a rough start to the year. The MSCI Japan Index was down hard last week and now stands down more than 10% on a year-to-date basis.
The Fed and Fixed Income Markets: Warming trend ahead for rates…
- The Ten-Year Treasury rebounded in yield last week, on some concern after Janet Yellen’s remarks that the Fed may move a bit faster on raising rates than previously thought. At week’s end, it closed at a yield of 2.74%.
- Yellen stated that rates could be expected to rise a “considerable period” of time after bond purchases end. She clarified when question that her definition of “considerable period” was likely in the 6-month timeframe.
- The Federal Reserve last Wednesday voted 8-1 to reduce its bond-buying program for the third meeting consecutively. Monthly purchases are now $55 billion a month, down from $85 billion at the highest level last year. The Fed statement also indicated that the bank would keep short-term rates below what is viewed as “normal” even if employment levels and inflation hit its targets, providing re-assurance of its intentions regarding low rates.
- Most Federal Reserve Board members in public statements have indicated that they don’t expect the first rate hike until sometime in 2015, with rates rising more steadily by 2016.
The Week Ahead:
- PMI Manufacturing “Flash” Index (Markit), [U.S.]
- S&P Case Shiller Home Price Index (S&P, Case Shiller), [U.S.]
- Consumer Confidence (Conference Board), [U.S.]
- Durable Goods Orders (Census), [U.S.]
- Personal Income and Outlays (BEA), [U.S.]