Market Insights: November 10, 2014
Economic Outlook: The Convincing U.S. Story versus the Mixed Bag
- Every piece of U.S. economic data we looked at last week was positive, without exception. The degree of conviction may vary, but directionally, the economic verdict is unanimous.
- Manufacturing remains strong. PMI’s Manufacturing Index while slightly lower than last month, still reads at a very strong 55.9 in October (Markit). The Manufacturing Index from ISM, however, posted a substantially strong reading of 59, signaling faster expansion. ISM’s Services Index was also strong at 57.1.
- Initial Jobless Claims recorded lower for the week at 278,000, and the 4 week moving average of 279,000 is a new 14-year-low (U.S. Dept. of Labor).
- The other aspects of the employment report were solid as well. The U-3 measure of unemployment is now down to 5.8%, and the U-6 “underemployment” measure has decreased 0.3% to 11.5%.
- The U.S. Labor force participation rate ticked up 0.1% to 62.8%, bucking the prevailing trend of downward moves in this measure. Private payroll growth for the month was +214,000 and we saw a +31,000 in revisions to prior months, just for further confirmation.
- Importantly, average hourly earnings rose +0.1%. The trend has been modest, but increasing nonetheless.
- True to the trend of the last several months, foreign economic data is mixed.
- China’s manufacturing numbers are holding. The PMI Composite is at 51.7, not a “hot” number, but definitely on the growth side of the meter. (HSBC/Markit). The European Union PMI Composite Is decent as well at 52.3.
- If you’re keeping score, the best performing country last month was Ireland (60.2) ahead of Spain (55.5), both countries registering 2-month highs. These two were in the “basket case” category 12 months ago. Germany, at 53.9, saw a minor deceleration in overall activity. France, at 48.2, was the major country in negative territory and their numbers have declined steadily over the past 4 months. Italy was barely in the black at 50.4.
- Total Retail Sales for the Euro-zone fell in September, but total figures for the 3rd quarter represented an increase (Eurostat).
Equities Outlook: The Earnings Results are Almost In
- Stocks across countries and sectors took a bit of a breather last week, following two consecutive super-strong weeks. The S&P 500 Index of U.S. Blue Chip stocks remain the far-and-away leader for 2014 YTD with almost a 12.0% return.
- In just over two weeks, equities have recovered all of the ground they lost during the recent correction. This rebound off the mid-October correction has been remarkably strong. Now that election uncertainties are behind us, the improving technical strength combined with strong earnings and fundamental economic data suggests potential for further gains in the fourth quarter.
- In the strong rebound from the recent lows, the technology and health care sectors outperformed, while oil, gold and most other commodities continued to demonstrate weakness.
- We are well through the earnings reporting cycle for the third quarter and corporate earnings show ongoing strength. With more than 80.0% of the S&P 500 companies reporting results, earnings are exceeding expectations by close to 5.0%. When we get to the finish line on reporting, third quarter revenues may show growth of 5.0%, earnings may be up by 8.0% and earnings per share by 10.0%. These are very good numbers.
- The earnings surprise metrics are the strongest since 2011; the revenue surprise metrics have not been quite as strong.
- In our post-election bulletin last week, we mentioned the strong historical precedents for a solid equity return in the third year of a Presidential Term, particularly with a sitting Democratic President and a Republican Congress. We expect to see equity prices continue to rise, though perhaps with more volatility than in recent years. Most importantly this should still produce better results than what can be found in other asset classes, which is why we are generally favoring maintaining a slight overweight position in equities.
Fixed Income Markets: Does QE “Over There” affect Us?
- The interest rate on the ten-year U.S. Treasury Note slipped slightly last week to 2.30% on Friday. The previous week’s yield was 2.34%.
- Bond yields generally have been rising a bit since the end of Quantitative Easing was announced, but certainly not yet at any sort of rapid rate.
- The Quantitative Easing policies now in place in Japan and the Euro-zone have caused appreciation of the U.S. dollar. Appreciation of the dollar may slow the increase in U.S. inflation rates toward the FOMC’s goal of 2.0% inflation.
- With a stronger dollar, the Fed might decide to delay commencement of increases in the federal funds rate next year. This could mean we might see the Fed raise the federal funds rate just once next year, because of the potential turmoil in global financial markets.
The Week Ahead
- U.S., NFIB Small Business Optimism Index
- U.S., Treasury Budget
- U.S., Retail Sales (Census, Dept of Commerce)