Market Insights: November 26, 2013
Happy Thanksgiving to you and your family.
“Market Insights” will return on December 9th.
Economic Outlook: Still far from where we’d like to be…
- The NAHB housing market index came in at 54 on the November report. The index has not shown a gain in 4 months, but has remained in positive territory. While the overall index has been pretty flat, the 6-month outlook was the strongest component within the report with a reading of 60.
- Existing home sales slowed in October (3.20%), but are still up about 6.0% from one year ago.
- More on the low inflation we’ve written about: The CPI actually declined slightly in October and the core CPI is up only 1.70% for the year-over-year reading.
- The Retail Sales report showed moderate growth in October, up 0.40% [US Department of Commerce]. Auto sales rebounded 1.30%, after a September decline.
- Friday’s Initial Jobless Claims continued their downward trend. The four-week moving average dropped to 338,500, from 344,000 the previous week.
- In a speech on Tuesday, Fed Chairman Ben Bernanke said, “The economy has made significant progress since the depths of the recession. However, we are still far from where we would like to be, and, consequently, it may be some time before monetary policy returns to more normal settings.”
- Bernanke also noted that he was in agreement with Janet Yellen’s remarks at her confirmation hearings – that the primary goal of monetary policy should be to promote a robust recovery.
- European Union PMI Composite “Flash” reading was updated to 51.5. This is not robust growth in the Euro-zone, but it is nonetheless positive. This confirms that the Eurozone has remained positive since the first half of this year even if the momentum is feeble.
- The German IFO Survey, which measures business climate, rose to 109.3 in November. This is the highest level since the early months of 2012.
- China’s PMI number slipped a bit, but remains in growth territory at 50.4 for November. October exports for Japan were strong, showing the largest gain since 2010.
Equities Outlook: Forward P/Es…
- We spoke last week about the level of the market and the fact that despite the level, there is a shortage of signs that would suggest some sort of Armageddon is around the corner.
- If the market were in real trouble of being over-extended and ahead of the economy, we would expect to be seeing weakness in certain stock sectors that are economically sensitive – airlines, autos, media, etc.
- These sectors are certainly not weak and are actually up more than the market. The Airlines and autos are up more than 50% year-to-date. Media, Specialty Retail, and Consumer Finance are up in the mid-30s.
- As we described last week, the market is not a bargain, but neither is it a bubble. The Forward P/E multiple of the S&P 500 is right at 15. The multiples for smaller stocks (the S&P 400 and S&P 600) are higher – 17.0 and 18.3, respectively. These are record levels and may suggest that the best values are actually in the bigger, mature companies.
The Fed And Fixed Income Markets: Fed talk…
- An interesting shift last week – according to The Bond Buyer, municipal bond mutual funds recorded inflows for the first time after 25 consecutive weeks of outflows. Maybe investors are starting to take note of the tax increases that were enacted at the first of the year.
- A white paper issued by McKinsey & Company last week presents an exhaustive study on the Fed’s QE program and estimates that the effect of QE has been to reduce ten-year Treasury yields by 65 to 100 basis points.
- In the release of the Fed Minutes last week, there was agreement by most FOMC participants that taper of quantitative easing should not be automatic. Data dependency still rules the day. Nonetheless, some participants argued for a specific timetable for ending QE.
- It is possible that the commencement of Fed tapering could be seen in December. However, it may very possibly not occur before March.
- The yield on the Ten-year Treasury did not move much and finished the week up slightly at a yield of 2.74%.
The Week Ahead:
- Monday: Pending Home Sales
- Tuesday: U.S. Housing Starts, Case-Shiller Home Price Index
- Wednesday: Durable Goods Orders