Market Insights: March 31, 2014
Economic Outlook – Some positive numbers posted…
- We seem to have survived the so-called “polar vortex” of cold weather. We have written considerably about the effects of cold weather on the recent economic numbers. The most recent data releases seem to confirm, however, that the underlying story of strength is still intact.
- Durable Goods Orders reversed a decline of 1.3% in January and advanced by 2.2% in February. [Department of Commerce]
- First-time Unemployment Claims also continued their downward trend, moving to a four-week average of 318,000. This level represents a low for the past six months.
- The Conference Board’s Consumer Confidence Index also made a surprising showing to the upside, posting at a level of 82.3 in last week’s release. This is up significantly from the reading of 78.3 in February.
- Foreign equity markets have of course been dominated by geopolitical events in the Ukraine. German Business Confidence registered a big decline for the first time in the last six months, apparently over concerns about the effect of potential sanctions against Russia.
- European Union Economic Sentiment Index advanced, however, in the most recent month to a level of 102.4, up from 101.2.
- Japanese Retail Sales are up 3.6% on a year-over-year basis according to the Ministry of Economy. However, overall household spending fell by more than 2%. The results of Abenomics are mixed so far.
Equities Outlook: Not too hot, not too cold…
- The domestic stock market (S&P 500) had a rather volatile week on shifting geopolitical headlines, but finished down less than 1% for the week.
- The equity market’s technical health appears reasonable, but admittedly is not flashing “green” on all indicators. We are keeping a close eye on some recent weakness in the secondary indexes, such as the Russell 2000, that has become evident during March. These indexes, as we have mentioned before, are priced at higher valuations than the blue-chips.
- The blue chip equity market is not cheap at its current level of about 15 times forward projected earnings. However at the current remarkably low interest rates, it certainly cannot be classified as expensive either. Not too hot, not too cold…
- The average yield on corporate bonds is still significantly lower than the forward earnings yield on the S&P 500 stock average. This provides a foundation of support for equity valuations.
The Fed and Fixed Income Markets: the Fed Chair speaks…
- The Ten-Year Treasury fluctuated significantly in yield last week, mainly on shifting headlines. At week’s end, it closed at a yield of 2.72%.
- Of note is the movement in the Five-Year Treasury Note. It has advanced from a 1.54% yield in the middle of March to 1.74% at month-end. In our judgment, the short end of the yield curve is priced rather richly.
- Federal Reserve Chair Janet Yellen has begun to send signals to the market regarding the indicators that she most closely watches. It is clear from her comments that she is paying attention to various measurements related to the labor market and particularly average wage levels.
- Based on movement in average wage levels, it is not likely these indicators are sending any signals to the Fed Chair that inflation pressures are building.
- Despite unscripted comments by Yellen 2 weeks ago about the possibility of increases in short-term interest rates as early as 2015, the data regarding wage levels suggest that rate increases may still be further in the future than that.
- Last week, the Fed also released its report on bank stress tests. The Tier-One Capital Ratio for all banks is now at a 20 year high. This may explain some of the recent pick up in commercial and industrial lending activity by banks.
The Week Ahead:
- ISM Mfg Index (ISM), [U.S.]
- ADP Employment Report (ADP) , [U.S.]
- Factor Orders (Census, Dept of Commerce) , [U.S.]
- ISM Non-mfg Index (ISM) , [U.S.]