Market Insights

Market Insights: March 30, 2015

Economic Outlook:  So Is The Glass Half Full?

  • Economists love the debate on whether the glass is half full or half empty. The Keynesian argues that the glass is half-empty, and that government needs to intervene to fill it up. The monetarist, on the other hand, believes that the glass will naturally tend to being full, and that to interfere with it would result in an inefficient use of the contents, with some quite possibly being spilled and wasted.
  • The U.S. data releases have admittedly been mixed thus far in 2015. The most recent releases, however, seem to weigh more to the positive side.
  • The flash report on the U.S. Service Sector PMI (from Markit) hit a high for this year at 58.6 in March, up from 57.1. Flash PMI manufacturing survey likewise posted a strong 55.3.
  • The data on U.S. housing has been erratic thus far in 2015. Two of the most recent releases were on the positive side. Last week, the Existing Home Sales numbers from the National Association of Realtors showed an increase of +1.2% in February and are up 4.7% compared to 12 months ago.
  • New Home Sales (U.S. Dept. of Commerce) popped up to an annual rate above 525,000 in February, which was well above expectations.
  • We saw a rebound in energy prices for February. This caused the widely followed CPI measure and the more stable Core CPI to increase by an identical +0.2% for the month. The 12-month measure shows much greater divergence, thanks to significantly reduced energy costs in the past year.
  • The year-over-year Core CPI is +1.7%, significantly above plain CPI at -0.1%. This puts Core CPI pretty close to the Fed’s target rate of +2.0%.
  • The Fed is closely watching the Labor market metrics. Initial Jobless Claims continue at low levels. The 4 week moving average dropped back below 300,000 to 297,000 in the latest week.
  • We saw last week the final release for 2014, Q4 GDP and it held at +2.2%. With some of the data we’ve seen in 2015’s 1st quarter, we may well see a lower annualized rate, and this would be similar to last year.
  • Based on several data releases from overseas that were negative last week, the strong U.S. dollar appears solidly in its bull market. The dollar-to-euro exchange rate has settled lately at around $1.09.
  • Consumer Confidence in the Euro-zone increased more than expected in March. This was the fourth consecutive monthly gain. The Confidence measure is now back to its highest level since 2007, and stands above its long-run average.
  • This continuing improvement in consumer sentiment is carrying through to the retail sales comparisons.
  • Growth of the Euro-zone economy picked up in March, according to flash PMI results. This important growth metric came in for March at 54.1, an increase from 53.3 last month. This puts the number at its highest level since 2011.

Equities Outlook:  Is That an “Exit” Sign?

  • The equity market’s difficulty in recent weeks has prompted a lot of questions from clients: Is it all over? Do we need to head for the Exit? While we could be in a corrective phase or perhaps something less (the new term is “dip”), we do not believe there is a need to panic here.
  • Remember people were feeling this way last year when the Dow Jones Industrial Average was off 1.3% at the end of the first quarter and people were predicting gloom and doom. The Average rebounded 9.0% in the next nine months to finish the year solidly positive.
  • In the last 60 years, stocks have been negative 22 times at the end of the first quarter. On 13 occasions, they’ve rallied during the last 9 months of the year. Many of the times the market did not rally, the U.S. economy was in recession. That is certainly not the case in 2015.
  • All major U.S. equity indices were down last week. It is difficult to point to a particular trigger, except perhaps mid-East tensions. Despite the decline, most equity markets remain positive on a Year-To-Date basis. The scorecard is led by the MSCI EAFE (foreign equities), followed by U.S. Mid- and Small- Cap, with U.S. Large Cap domestic stocks in last place. This order pretty much reverses the order for 2014.
  • With the strong U.S. dollar, earnings estimates for S&P 500 companies have been pulled in. Because of this, U.S. stocks cannot really be called cheap. The forward-earnings Price/Earnings multiple is now about 17 – 17.5. This likely means that future returns have somewhat of a bit of a valuation headwind.
  • However the same metric for foreign stocks is lower by as much as one-third to one-half in many cases. So stronger earnings growth overseas and improving currencies offer excellent opportunity.

Fixed Income Markets:  How Low Can You Go?

  • We discussed last week the elimination of the word “patience” from the Federal Reserve’s statement that was released. Despite this word being removed, Bob Eisenbeis, former Director of Research at the Atlanta Fed, makes a good case writing last week, that you could fairly add the words “extremely cautious” to the Fed release.
  • Eisenbeis’s conclusion: if you pay attention to the latest forecasts turned in by the various regional Fed Banks. They have all turned in a much tighter, and lower-sloped band for projected trajectory of the Fed Funds rate over the next 24 months. So the various Fed governors are adjusting their thinking to the likely continuation of unusually low rates.
  • Talk about low rates, we discussed in recent weeks the negative yields in Europe. We saw some records last week. Two-year yields in Germany were -0.25%. Similar levels were noted in Finland and the Netherlands.
  • 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 1.96%, a touch higher than last week’s 1.92% but still off significantly from the level two weeks ago of 2.11%.
  • Yields are so low on bonds, it is not surprising that investment grade taxable bonds are at about a 1.0% return for the year so far despite some volatility. We are about +1% YTD for investment grade municipals as well.

The Week Ahead


  • U.S., Case Shiller Home Price Index
  • U.S., Conference Board’s Consumer Confidence


  • U.S., ADP Employment Report
  • U.S., PMI Manufacturing (Markit)
  • U.S., ISM MFG Index
  • U.S., Construction Spending (Census, Dept of Commerce)


  • U.S., Employment Report (BLS)