Market Insights

Market Insights: May 4, 2015

Economic Outlook: Short-Term Blips in the Bigger Picture.

  • We have written much in recent months about the mixed nature of U.S. economic data since the end of 2014. Most of the media hype emphasizes the negative tilt of certain data points. While data for the first quarter showed weak GDP growth, there are a number of reasons to conclude that the bigger picture continues to be positive.
  • Let’s start with a data-point popularized during the Ronald Reagan years – the so-called Misery Index. This Index is the sum of the unemployment rate and the inflation rate. The point of this single number is to convey how the average wage earner is faring in the current economy.
  • Although it might be surprising amidst the negative economic headlines, the Misery Index has not been this favorably low since the late 1950s. In fact, you have to go back to 1959 to find a time when the combined score for inflation and unemployment was as low as they are today.
  • The skeptics reply, “…well, all of that is fine, but there is just no income growth for the average wage earner”. While such protests make good political debate, the actual data suggest something different. The rate of growth in the Employment Cost Index has now accelerated for four consecutive quarters. The current annualized growth rate of 2.6% is in fact the strongest pace since 2008.
  • It is true of course that the actual new jobs numbers have not been as compelling in the last couple of months. That said, we should note that Initial Jobless Claims continue to stand at 262,000; this is a super low level, in fact the lowest since April of 2000.
  • Weak job growth or not, the first quarter closed out with an increase in Personal Consumption Expenditures (PCE). This is a pretty reliable barometer on the confidence felt by U.S. households in managing spending.
  • Though PCE finished strong, the growth in personal income has not been equally robust. Year-over-year personal income growth currently stands at 3.8%. While this is not as high as the 4.8% number posted at the end of 2014, it is not a number which would suggest contraction in the U.S. economy.
  • How can consumption spending be strengthening ahead of income growth? Here’s the reality: the Personal Savings Rate numbers are strong at the moment. This means consumers have room to increase spending even if incomes are not rising at quite the same pace that we saw last year. They can simply slow down a bit on their level of savings.
  • Also, the National Association of Realtors reports that the Pending Home Sales Index increased 1.1% in March, the third straight month of increases. A more robust housing market tends to reassure consumers with regard to their spending plans.
  • All of this suggests to us that talk of an outright downturn or contraction in the U.S. economy is significantly premature.
  • In his bulletin last week, Gluskin-Shelf’s David Rosenberg noted that Paychex, a provider of payroll services to businesses, reported an 8.0% year-over-year revenue gain in the first quarter. This is anecdotal evidence of a tangible sign of progress on the income front. Rosenberg noted a similar barometer: UPS, the package delivery company, managed to beat earnings expectations for the first quarter by a full three cents per share.
  • This thesis of continued growth may be a little difficult to process for those of us hailing from Texas. Though oil prices have rebounded strongly over the past month, business activity in Texas is still depressed from last year, according to survey data. The Dallas Fed’s Manufacturing Survey currently has the Business Activity Index at -16 and the Production Index at -4.7.
  • However, this all may be following a pattern similar to what we saw back in the 1980s following oil price declines. Despite unsettling declines in oil prices during the 1980s, the growth cycle was not interrupted, although we had a couple of quarters of poor GDP growth. It would’ve been a mistake to panic in the 1980s over the economic recovery.
  • It is likely a mistake to panic in 2015 as well.

Equities Outlook: Rough Week. What’s Ahead?

  • It was a rough for equities last week. There was a fairly steep sell-off in the equity market Wednesday and Thursday, but a solid rebound Friday (183 Dow points) mitigated the effects on the week.
  • With the market at valuation levels in line with historical averages, earnings become the key to further moves in stock prices. Current earnings estimates for S&P 500 companies are for year-over-year declines of 2.0% in the first quarter, 3.0% in the second quarter, and 0.6% in the third quarter. On the surface this is disconcerting, but it is not the whole picture.
  • Strip out the Energy Sector companies, however, and the picture changes: these estimates change to an increase of 6.2% in first quarter, 5.2% in second quarter, and 6.7% in third quarter, reflective of a continuing growing economy propelling corporate earnings ahead.
  • Through Thursday of last week (last day of April) the performance disparity between international and domestic stocks has become even more noteworthy, something we have been talking about for a while.
  • Year-to-date returns through April present an interesting scorecard: S&P 500 +1.92%, MSCI EAFE +9.16%, MSCI Emerging Markets +10.10%.

Fixed Income Markets: Second Half of the Second Half?

  • The reversal of the decline in yield on the 10-Year Treasury Note gained further momentum last week, as the yield on the 10-Year closed at 2.11%, up strongly from the previous week’s 1.91% yield.
  • Last week saw the release of the report from the Federal Reserve’s Open Market Committee. What is most notable about this report is the remarkable about-face in tone from the report of just two months ago.
  • Last week’s Fed report contains a number of references to weakening economic data that were previously cast in a positive light just two months back. This change in tone interpreting the most recent economic data suggests that any announcement of an increase in the Fed Funds rate is unlikely in the next meeting or two. We are likely looking at the second half of the year for an increase announcement, and perhaps in the second half of the second half.

The Week Ahead


  • U.S., ISM Services Index


  • U.S., ADP Employment Report
  • EU, PMI Composite (Markit)


  • U.S., Employment Report (BLS)