Market Insights: March 3, 2014
Economic Outlook: Follow the bouncing balls…
- A big turnaround in the weak housing data: January’s New Home Sales [Commerce Department] jumped almost 10%.
- Here’s an interesting ad hoc data point. The California Association of Realtors noted that its January pending home sales index rose more than 20%. This news from the west coast tends to confirm that some of the drop-off in the national housing numbers at the end of 2013 might indeed be attributable to cold weather.
- Even Fed Chair Janet Yellen played the meteorologist in her testimony before Congress, relating the weaker economic data in recent weeks to weather and saying that the Fed “weighs the impact” of weather in its decisions.
- The bad news and the good news…Durable Goods Orders decreased 1% in January, following on December’s weakness. However, eliminating transportation (which is the most volatile portion of the report), new orders actually rose 1.1%.
- The market consensus on this gauge was surprised by a surge in computers, electronics, and fabricated metal products.
- The 4th quarter GDP growth number was revised down to 2.4% from the originally reported 3.2%, but this adjustment was fully expected by market observers, [Bureau of Economic Analysis].
- Consumer sentiment seems to continue to be strong. While the Conference Board’s survey suggested some weakness, the Bloomberg sentiment survey and University of Michigan index were both higher from last month.
- News from across the pond continues showing strength. Germany’s business climate index climbed to 111.3. You have to go back almost 3 years to find it at these levels, [German IFO Survey]. Consumers in Europe are feeling better also. The sentiment index rose to 101.2, also almost a 3-year high.
Equities Outlook: Technically speaking…
- February closed out as a good month for the market, with the S&P 500 gaining more than 4% and reversing January’s difficult start to put the benchmark in positive territory on a year-to-date basis.
- While there are always potential problems that represent threats to continued advances in equities, to a certain extent, good performance feeds on itself and creates a healthy backdrop.
- Technically speaking, the market’s tone is healthy. The S&P 500 reached a high on Thursday, and there is strength evident in both the NASDAQ and the Russell 2000 index of smaller companies. We need a confirmation by the Dow Industrials and the Transportation average to make it unanimous.
- This strength seems evident in the shallow extent of the “correction” we saw during January. It was technically only a dip of 5.8%, demonstrating that there is ample cash on the sideline willing to buy on dips despite the aggravated flavor of doom and gloom headlines back in January.
- Underneath the hood, the fundamentals seem to be there. 66% of the S&P 500 companies have beaten analysts’ estimate of earnings and almost the same proportion are beating top line revenue estimates.
- This all seems entirely consistent with our basic premise for equities: fundamental bear markets (distinguished from corrections) are precipitated by recession in the economy. The signs portending recession are just not there: No inverted yield curve, no widening of credit spreads, no sustained pick-up in initial jobless claims or decline in consumer sentiment.
- From a foreign perspective, there are not big standouts which show divergence. We’ve written about the difficulties for emerging markets, but this difficulty seems contained. Russia’s market is performing poorly which is no surprise, given the Ukraine stresses.
The Fed and Fixed Income Markets: The Federal Reserve and continued low rates…
- The Ten-Year Treasury drifted a bit lower in yield last week. At week’s end, it closed at a yield of 2.65%, virtually unchanged from the previous week.
- Treasuries rallied nicely this week and there was good demand at the auction of seven-year notes. The ratio of bids to actual buys was 2.7 to 1, higher than the recent average. In the short term, at least, bond buyers do not seem overly concerned about a breakout of inflation pressures.
- Fed Chair Janet Yellen testified to Congress that the Fed Funds rate is likely to remain low, even though unemployment may drop below 6.5%. She described the 6.5% benchmark not as any outright definition of full employment, but rather just a trigger for discussion on policy by the Fed.
- Clients ask us often about their fears regarding Fed policy and “all this money they are printing”. The Fed does indeed weigh the risks to financial stability of asset bubbles which might develop in the economy. Fed Governor Daniel Tarullo spoke last week about their assessment of the risk that low rates are encouraging excessive investor risk-taking. He characterized their appraisal of this threat as “relatively moderate to date” and indicated no change in policy would be warranted at this stage.
The Week Ahead:
- ISM Mfg Index (Institute for Supply Management) [U.S.]
- ADP Employment Report (ADP) [U.S.]
- Fed Beige Book [U.S.]
- Factory Orders (Census, Dept. of Commerce) [U.S.]
- Employment Report (BLS) [U.S.]