Market Insights: September 30,2014
Economic Outlook – At Home and Abroad
- On Economic data, the U.S. continues to be where the action is. Overseas economies are struggling by comparison to the homefront.
- U.S. Existing Home Sales declined slightly in August, falling 1.8% month-to-month (National Association of Realtors). New Home Sales however, jumped 18% to a 504,000 annualized rate, led by surging sales in the Western region of the US (Commerce Dept.). New Home Sales through the third quarter are up 37% at an annual rate.
- The PMI Manufacturing Index “Flash” remains strong at 57.9 (Markit). The same was true for the PMI Services “Flash” at 58.5.
- Initial Jobless Claims are under 300k for the second straight week at 293k (Dept of Labor).
- The GDP number for the Second Quarter was revised up to +4.6% from +4.2%, previously on improved readings for fixed investments and exports (BEA).|
- The University of Michigan Consumer Sentiment gauge remained steady at 84.6, a solid reading.
- China’s PMI Manufacturing “Flash” continues to hover around the expansion/contraction line, reading 50.5 in the most recent month.
- European Union PMI Composite “Flash” weakened modestly to a reading of 52.3. Germany continues to do relatively better than most other countries in the Euro-zone when measured by this metric. France is doing relatively worse, highlighting the perception of the structural difficulties facing the French economy.
- The German IFO Survey pointed to some weakening economic activity in August, showing declines in both the “Current Conditions” as well as the “Expectations” components within the survey. We may be some months still from re-establishing a firming trend in the Euro-zone.
Equities Outlook: Can You Believe It?
- Last week exhibited some of the increased volatility we’ve been anticipating in the equity markets. Geopolitical influences seem to be trumping positive economic data, at least in the short-term. Despite this increased volatility, our analysis still suggests that we remain in a bull market. Unless we see a decline in technical indicators or in the ISM surveys or in consumer confidence, we believe the odds are in favor of investors remaining fully committed to this market.
- This certainly does not discount the possibility of a near-term correction. However, it suggests that if a somewhat more bearish mind set should take hold, it could present good buying opportunities at attractive price levels.
- Investors with a time frame of three to five years who want yield are better off in the stock market, paying a 16 multiple on earnings, than in bonds, where they must pay the equivalent of a 40 multiple to get the same yield.
- Though clients have been disbelieving the gains in the stock market, it is based primarily on earnings gains. Analysts are forecasting a continuation of the gains. Analysts expect faster year-over-year earnings growth in 2014 for two of the three major S&P Indexes – Large Cap and Mid Cap.
Fixed Income Markets: A Bound-up Range…
- The interest rate on the 10 year U.S. Treasury Note eased to 2.54% on Friday. This is a very slight decrease from the previous level of 2.59% the week before, but remains above the key trading level of 2.5%.
- Chicago Fed President, Charles Evans, is a non-voting member of the Fed who will become a voting member in 2015. He commented in a speech last week in Washington, that “although we have made great strides, a good deal of slack remains in the labor market.” This may be an insight into his timetable for voting to tighten, and he titled his speech, “Patience is a Virtue…”
- Dave Rosenberg of Gluskin Shelf commented last week that so long as the Federal Reserve does not signal an early rate hike, the 10-year note is likely range bound between 2.3% and 2.65% for the near term.
- The municipal bond market has settled to a degree. For the highest grade AAA municipal debt, the entire municipal bond yield curve is now below the corresponding U.S. Treasury curve. Though this is the “normal” condition, it has not been true for some time.
- In a time of low rates, we take caution to avoid stretching for yield. Some areas look pricey. The Wall Street Journal ran an article last week commenting on this very subject (“Junk-Bond Investors Start to See Warning Signs”).
The Week Ahead
- Pending Home Sales (National Association of Realtors)
- Consumer Confidence (Conference Board)
- ADP Employment Report (ADP)
- PMI Manufacturing (Markit)
- ISM Manufacturing (ISM)
- Construction Spending (Dept of Commerce)
- Employment Report (BLS)
- Services Survey (ISM)