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A weekly snapshot of economic and financial markets news, and Wilmington Trust's investment views.

September 26, 2014

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Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

September 19, 2014


Back where we started. The S&P 500 index powered up by 130 basis points this week¹ after these dark clouds of uncertainty were largely pushed away:
  • Possible Fed rate changes. Pre-Fed meeting anxiety about changing commentary language around higher rates proved premature. Friday finds us close to where we began on Monday, with the U.S. 10-year Treasury at 2.60% and commentary language unchanged. The Fed guidance on rate increases told us that real rates are expected to rise and should continue to support stocks over bonds.
  • Overblown inflation fears. We believe the U.S. economic recovery still has legs. Inflation data—along with labor and commodity updates—show us that the nation hasn't entered the later stages of this economic cycle. We continue to expect equity markets to do well, particularly once the midterm elections are behind us.
  • Scotland's independence vote. The decision to remain a part of the U.K. helped mute global investor demand for U.S. Treasuries, seen as a safe haven in terms of currency and yield. The Scottish vote paled in comparison to the issues related to a "euroland" break-up. It remains to be seen over the next few years whether (and how) a nation may secede from the EU. Political movements in nations like Spain and Italy are highlighting the increasingly different economic conditions among EU countries and have been gaining support. Despite little change in the MSCI EAFE index, uncertainties will continue to weigh on international equity returns, in our view.
¹At press time.

Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

September 12, 2014


September is off to a whimper with the S&P 500 down 0.3%—fairly typical of the month's performance in prior midterm election years, where the average is down about 1.2%.¹ Rather than the elections themselves, however, we see the following as the major drivers.
  • When the Fed talks, fixed income markets listen: Yields on 10-year Treasuries were up nearly 20 basis points this month in anticipation of next week's Fed meeting. Markets have been eagerly waiting to see if the Fed will delete from its guidance the long-held phrase "considerable period" (describing how long rates would stay down); project short-term rates into 2017 close to 4% (above market expectations of 2.5%-3.0%); and finalize its quantitative easing exit strategy.
  • Potential impact of Scottish freedom: Atop the stress of Russian sanctions on the European economy, recent poll results showing an increased likelihood of Scotland seceding from the British Empire led to a 2% drop in the British pound. Also, the prospective split has raised a number of questions that could lead to investment uncertainty and potentially suppressed performance.
  • U.S. steps up anti-terror campaign: While most Americans favor the U.S. taking a more active role in ending ISIS' reign of terror, the president's policy change takes his administration in a direction it's avoided up to now. Color us skeptical that defeating this slippery opponent can be accomplished without putting boots on the ground.
The above issues are more about the slowly shifting tectonic plates whose tremors have been causing the investment world to pull back and contemplate. The overall backdrop remains in place as does our current positioning, favoring stocks over bonds and U.S. over international investments. Of historical note: For the last quarter of a midterm election year, the S&P 500 has gained an average 6.5%!¹

¹Strategas Research

Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

September 5, 2014
  • U.S. economic data support continued overall slow growth (with still-low inflation and interest rates, which should allow the Fed to move slowly) and is supportive of our equity overweight, showing:
    • Higher orders for…
      • Factories—up a record 10.5% in July; on a smoothed year-over-year (y/o/y) basis, factory orders are up 6.7%, the most since February 2012
      • Durable goods—rose 22.6% in July, led by civilian aircraft orders
    • A big retail sales jump. The ICSC/Goldman Sachs Chain Store Sales Index was up 4.8% y/o/y, the most since December 2011, driven by strong performance of dollar stores and wholesale club operators
    • Positive employment indicators in August, despite disappointment in the 142,000 August payroll rise (a situation we feel is likely a one-off) while anecdotal and other evidence on the employment situation points upward:
      • Employee confidence (measured by the Rasmussen Employment Index), rose 2.8 points to 101.2, its highest level since July 2007
      • Help-wanted ads on the Conference Board website had a record-high 3.3% bump
  • Housing trudged along. The MBA Refinance Index edged up 1.4%, while the Purchase Index fell 1.5%, led by the government sector. Mortgage demand remained range-bound at relatively low levels, reflecting in part the tepid housing market recovery and still-tight lending conditions.
  • European Central Bank lowered interest rates and announced asset-buying programs, which we think may lead to euro depreciation. Its actions were intended to counter a loss of momentum in GDP growth and in inflation, as well as to lessen the impact of sanctions against Russia. The prospect of further sanctions led to a Ukraine/separatist ceasefire—positive for our international equity position—yet it is such a fluid situation, it's hard to draw any long-term conclusions.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

August 29, 2014
  • Stocks over bonds. This week's releases reaffirmed continuing U.S. economic growth—with new home sales increasing markedly from a year ago, July housing starts and consumer confidence both up, and second-quarter GDP reflecting growth at a pace well ahead of inflation. All this plus an 8% hike in the S&P 500 year-to-date reinforces our preference for equities.
  • U.S. stocks over non-U.S. Many European countries such as Spain, Italy, and Greece are experiencing depressions. The recent quantitative easing by the ECB has had less impact than similar efforts in other regions due to its late start, which means that additional currency weakening and more coordinated efforts by the individual finance ministers likely need to take place for a comparable impact. The MSCI All Country World (ex-U.S.) index is up less than 5% so far this year.
  • Rates in no hurry to rise. The U.S. 10-year Treasury dropped to 2.34% this week. Middle East and Ukraine uncertainties still give markets reasons to seek safety in portfolios. We believe tensions will subside and the U.S. recovery will pressure real rates higher over the next 6 – 12 months. The Barclays Aggregate index shows bondholders have booked almost 5% so far in 2014.
  • Overall outlook. With bond prices pushing yields to low global levels and stocks at high multiples on a cyclically adjusted basis, we feel future investing returns will be fairly muted. The good news? Inflation has remained under control and, for now, markets believe in an orderly central bank unwinding. We are closely watching the movement of the yield curve, the relationship between small- and large-cap stocks, and a potential emerging market equity recovery.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

August 22, 2014
  • Déjà vu all over again. With the S&P 500 index just setting a new all-time high and yield spreads on Ba-rated high-yield bonds tightening yet again, risk appetites have swelled anew. But will this latest trend have legs? Understanding the triggers that have repeatedly shifted market sentiment is critical in trying to answer this question.
  • Global tensions set an uncertain stage. July's market swoon did an about face around Aug. 8 when Russia began to signal a desire for peace with Ukraine. This situation is probably the greatest source of uncertainty in our outlook, as the resulting sanctions are starting to imperil the fragile European recovery. In recent days, tensions have eased and peace talks have begun, giving markets a reason to rally. For a relief of economic pressures abroad, however, sanctions must be lifted—an issue that isn't even on the table—leaving us to think that more volatility is ahead.
  • Strengthening U.S. economy emboldens markets. Reduced global tensions wouldn't be enough to lift markets if the U.S. economy weren't picking up steam—in particular, the strong auto and even the long-suffering housing market. This past week saw gains across the board in housing starts, building permits, and existing home sales.
  • The best may be yet to come. As we see it, markets have had stops and starts when succumbing to momentary fear, but when doubts played themselves out, the underlying strength of the U.S. economy has powered markets upward. With no sign of recession, we see little reason for this pattern to change and remain firm in our belief that equities will continue to offer some of the best returns going forward.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

August 15, 2014
  • Economic troubles abroad. Recent reports from two of its major economies cast a cloud on Europe's recovery, with the German economy shrinking by 0.2% in the second quarter and France's stagnating for the second quarter in a row.
  • Eerily quiet on the home front. Economic indicator data were uninspiring for the U.S., with reports out this week revealing that applications for unemployment benefits rose more than forecast. Sales growth slowed over the last quarter after the rebound from the weather-related weakness early in the year. Domestic vehicle sales for July were 1.9% below expectations and 2.3% below June's figures. Retail and food services sales were virtually unchanged from June, at a negligible rise of 0.5%. The MBA Refinance Index—a leading indicator of mortgage prepayment activity and home sales—fell 4% this week. The Congressional Budget Office (CBO) expects the July 2014 federal budget deficit to be $96 billion, compared to $97.6 in July 2013. The CBO also forecasts a deficit of $492 billion for the full budget year, which would be the narrowest gap since 2008.
  • A silver lining. Taken together, the factors described above have kept yields for the 10-year bond under 2.5%. The silver lining of slower growth is that it eases pressure on the Fed to raise rates which in turn appears to support equity prices. Thus, while we recognize the geopolitical risks and the fragility of the global economy, we continue to see improvement in the U.S. economy, expect interest rates to rise, and remain comfortable with our overweight to stocks and our shorter-than-benchmark duration.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

August 8, 2014
  • The big picture. The last few weeks have meant big changes in year-to-date results, which have been unsettling to many investors. But keep in mind this high-level perspective: The S&P 500 remained in positive territory, up more than 3% year-to-date, despite some measures of the U.S. equity market having given up all of 2014's gains. Bonds were also up for the year so far as interest rates have fallen, with the U.S. 10-year Treasury yield touching below 2.4% and the Barclays Capital U.S. Aggregate Bond Index up over 4%.
  • Taking stock of equities. Attacks in Gaza, U.S. airstrikes in Iraq, and economic sanctions between Russia and the developed world have all rattled global equities. Earnings were still positive, however, as were the underpinnings of equity valuations, in our view. Filings for unemployment benefits fell again, the U.S. trade deficit shrank, and most 2014 economic forecasts were positive. Housing, though, was still lackluster, with continued revisions to the releases for starts and home sales, leading to our call for its muted near-term contribution to the economy. On balance, we remain comfortable with our equity overweight.
  • Getting a fix on bonds. Those same geopolitical factors appear to have driven some investors into bonds, which has driven down yield and increased price despite economic improvements and the Fed's ongoing bond-buying taper. Interest rate futures continued to point to an increase in rates over the next 12 months and we still think that's the most likely path. We continue to position ourselves at selective points along the yield curve that we believe are based on our overall fixed income exposure.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

August 1, 2014
  • Do dips goeth before a fall? Months of good performance have coexisted along with many concerns, but these pressures finally broke through. While the S&P 500 closed at record levels on July 24, it gave up 2.9% the next week (to end July with a -1.5% price dip). So what's changed? Very little. Economic uncertainty, global turmoil, Portuguese banking problems, and an Argentinean debt default are serious issues but do not, in our view, signal troubling emerging trends. More likely, the collective weight of these issues has caused investors to take profits or pull back, thus letting prices retrench.
  • Fed still on hold until next year. The biggest market game changer could be a surprise as to the timing of a Fed rate hike. Expectations for June 2015 are well baked into the market and, while economic reports out this past week could move up a start date, we find it unlikely. Second-quarter GDP growth at 4% was well above 3% expectations and a less–strong–than–expected employment report still showed relatively robust job creation. With no specter of inflation, we feel the Fed will bide its time and not be spooked by strong growth numbers.
  • Forecast: positive but muted gains. The wrist slap for investors is a good reminder that, while we look forward to positive performance, we feel near–term gains will be modest and in the single–digit range. Choppy markets will likely dominate for now and sitting tight will be a key to success. Or as the philosopher Rousseau said, "Patience is bitter, but its fruit is sweet."
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

July 25, 2014
  • Specter of inflation just a shadow. After years of sluggish price gains, inflation has inched up, but at a snail's pace per the latest Consumer Price Index figures. June's year-over-year increase in all prices was 2.1%, and prices minus food and energy slipped to a 1.9% annual gain from 2% in May. Against this background, we reiterate our call for the Fed to move slowly when it starts to raise interest rates again.
  • Broad labor trend improving. Last week showed unemployment applications dropped to 284,000, the fewest since 2006 and lower than economists had forecast. Bloomberg expects further confirmation of positive trend with next week's jobs report, with 230,000 nonfarm jobs added in July and the unemployment rate steady at 6.1%.
  • Halftime earnings report. With nearly 50% of S&P 500 companies reporting, ex-financial firms have beaten earnings expectations by 3.7% and revenues have beaten estimates by 0.6%. Tech bellwethers Apple and Facebook beat earnings forecasts on the back of strong iPhone volumes and mobile advertising strength, respectively, although Apple's revenues were below expectations.
  • Mixed housing picture. Previously owned home sales climbed for the 3rd month in a row, hitting the highest level since October. The National Association of Realtors' seasonally adjusted pending sales index rose 2.6% in June to an annual rate of 5.04 million. Revisions for May showed a pace bump of 2 million over the originally reported 4.91 million. The new home sales front, however, unveiled a 9.3% lower-than-forecasted drop in June and a downward revision from 6.5% to 7.3% for April data.
  • In a nutshell. The economic expansion continued – albeit slowly – and has been generally supportive of our equity-emphasized position.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

July 18, 2014
  • Geopolitical turmoil & markets. Israel followed up its air campaign in Gaza with a troop invasion, while an unconfirmed party downed a commercial airliner in the Ukraine on the heels of President Obama escalating sanctions against Russia for its part in the Ukraine conflict. Russian markets pulled back in anticipation of the sanctions' potential economic impact. U.S. securities also reacted to the week's events, but overall volatility and futures prices showed the markets did not go into panic mode.
  • Quarterly earnings season update. With almost 25% of the S&P 500 having reported so far, we've seen big banks top market expectations, and nonfinancials beat current quarter top-line revenue estimates by around 1% (and overall earnings by nearly 9% over the same period in 2013). Continued earnings strength has been one key factor supporting equity prices and our optimism.
  • Stormy weather wilts pace of housing progress. The housing market continued to improve but at a tortoiselike, unsteady pace, with June showing a decline in construction starts of over 9%. While this may be due in part to rain in certain regions, the patchy housing and overall economic recovery indicate continued low overall GDP growth and little support for inflation surprises.
  • The Federal Reserve weighs in. The release of its latest regional economic activity summaries noted unsurprisingly moderate growth and labor advances across all 12 Fed districts, and continued consumer spending. We still worry about the transition from full- to part-time employment for a big part of the labor force. It's good that people are getting back to work and spending, but they've not done as well in this recovery as they have historically.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

July 11, 2014
  • Bye-bye bond-buying. On Wednesday, the Fed released June meeting minutes revealing the plan to end its monthly bond-buying program in October, provided the economy continues to progress. For investors, this represents a big psychological step toward a return to normal for both fixed income and equity markets. With no inflation and tepid growth, we expect the Fed to move slowly in raising interest rates, which also bodes well for calm seas.
  • Markets take bank failures on the chin. Accounting irregularities at one of Portugal's largest banks raised fears of contagion that it might lead to bank failures across the continent, yet there were no signs of broad panic in the financial markets worldwide. That Greece managed to issue bonds the same day and the VIX (volatility index) rose slightly to a still-low level below 13 shows global markets took the news in stride and are not especially skittish.
  • Let the 2Q reporting begin. Expectations had been for solid 2Q earnings based on the economy's rebound. The S&P 500's median earnings growth rate was 7.7%, with materials and energy expecting double-digit growth while telecom and utilities are down-to-flat. Earnings disappointment Lumber Liquidators led analysts to cut forecasts for industry mates. We expect a big gulf in the market's reaction between firms who beat and miss expectations.
  • Indicator arrows point up. The OECD Composite Leading Indicators edged up in May. It was the second gain in a row and brought the index to its highest level since October 2011, providing evidence that the global economic soft patch seen in the first half of the year has ended.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

June 27, 2014
  • Leaderboard at the half. Capital markets results were generally positive but fragmented for the first half of 2014. The Russell 1000 gained nearly 6%—a satisfying result shared by the commodity, REIT, Brazilian, Italian, and Spanish markets—while other markets struggled. The DJIA and Russell 2000 Small Cap index were up less than 2%, while the Japanese Nikkei and Chinese Shanghai Composite are in negative territory.
  • Look to earnings growth. Interesting challenges likely lie ahead from now until year end, as markets come to grips with expectations around Fed policy, productivity and profit margins, and the evolving recoveries in Europe and emerging markets. In this environment, we believe earnings growth will lead the way with little support from further multiple expansions.
  • GDP: 2 steps forward, 1 step back. At the start of the year, Bloomberg's survey of economists anticipated a gain of about 2.5% for January - March. But, after awful winter weather, a dramatic slowdown in inventory accumulation, and an overstated correction in healthcare spending estimates, 1Q has experienced roughly a 3% economic activity decline. We still expect a 2Q rebound, but full-year 2014 growth will not likely top 2%.
  • Good news anticipated on the labor front. June's employment report will be announced next week and is expected to show continued improvements. Non-farm payrolls should advance by just over 200,000 while the unemployment rate will likely hold steady at 6.3%, according to Bloomberg.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

June 20, 2014
  • Fed eases up on quantitative easing. After its two-day meeting, the Federal Reserve announced that it had cut its economic forecast but that it expected the economy to continue a slow and steady expansion, permitting it to continue to reduce the stimulus program. It would cut monthly bond purchases by $10 billion to $35 billion and plans to end purchases this fall. It also indicated that it is likely to start raising its benchmark interest rate next year.
  • Who's afraid of the stock market? Not investors. The VIX, aka the fear index, which measures expected volatility in the stock market, fell below 11 to near-historic lows this week, suggesting that investors see little risk in the near future.
  • Much ado about modest oil price bumps. Despite headline news about a hike in oil thirst, prices have risen only slightly and remain well below their post-recession peak, indicating the markets are only modestly concerned about the economic impact of current clashes in the Middle East.
  • Positive growth outlook underlies our preference for stocks. We remain comfortable with our overweight to stocks and their valuation relative to bonds, given expectations for economic growth to continue and even accelerate. The S&P 500 Index eked out yet another new high; at the same time, we recognize that an unexpected slowdown would probably send the market materially lower.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

June 13, 2014
  • In response to violence in Iraq (OPEC's second largest oil producer) and talk of a sectarian civil war, oil climbed to an eight-month high – and the stock market took a hit. We believe a perception of U.S. weakness is leading to more confident, aggressive action by China (South China Sea), Russia (Ukraine), Syria (against rebels), and recently a militant force in Iraq (in fact, one might consider Syria and Iraq one theatre).
  • Retail sales increased 0.3% in May, half the Bloomberg forecast. However, on the positive side, April sales were revised up to 0.5% from 0.1%, bringing the net increase from the two months in line with expectations. The first quarter GDP number is likely to be revised lower – due to downward revisions in healthcare spending that were originally reported to have grown by more than 10%. We still expect second quarter growth to approach 4% and for the second half of the year to grow at 2.8%.
  • House Republican Leader, Eric Cantor, unexpectedly lost his primary election to a little known Tea Party challenger, Dave Brat. The question is whether this represents a come-back for the Tea Party, with threats of government closure, Treasury defaults, and other signs of dysfunction in Washington.
  • Initial jobless claims came in below 320,000, a level last seen before the recession. Annualized U.S. auto sales ran up 16.7 million, also a post-crisis high water mark. Housing starts, which will be announced next week, were half of peak but have been moving up lately.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

June 6, 2014
  • Responding to the growing fears of deflation, the European Central Bank (ECB) announced a number of new policy initiatives intended to lower borrowing costs and provide new cheap financing vehicles for small and mid-sized companies. Markets reacted somewhat positively to the effort but we believe the ECB has more work to do to stimulate lending activity and fully thwart prospective deflation.
  • Job growth in May totaled 217,000 non-farm workers, which was very close to the expected 215,000 gain. The report also showed little change in the employment situation, with the unemployment rate and the labor force participation rate both unchanged. The report confirmed the steady pace of job growth which has held near 200,000 for most of the last year and a half. This should be supportive to markets and probably not put added pressure on the Fed to consider any policy adjustments.
  • The Federal Reserve announced that Household Net Worth rose an estimated $1.5 trillion during the first quarter with the gains pretty evenly split between financial asset and housing appreciation. Household Net Worth now stands 18.7% above its pre-crisis peak reached in the second quarter of 2007, a gain which has no doubt helped to stimulate spending and offset the drag created by the slow recovery seen in other areas, such as employment.
  • The key statistic for next week will be retail sales for May, which are expected to be up around 0.5%. Given our outlook for a strong rebound in economic growth in the second quarter and the fact that consumers seemed to have taken a spending breather in April, retail sales will have slightly higher-than-usual importance.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

May 30, 2014
  • In a sign that the labor market continues to strengthen, the Labor Department reported that jobless claims fell by 27,000 to 300,000 in the week ended May 24.
  • For the first time in three years, the U.S. economy contracted, as measured by Gross Domestic Product (GDP), which fell at a 1% annualized rate in the first quarter. Inventory growth slowed and companies reduced investments. The silver lining is that sales at retailers have grown.
  • We do not expect the decline in first quarter growth to lead to a recession as the second quarter is expected to show a significant rebound. Given our expectations for more normal inventory accumulation we are expecting to raise our current second quarter GDP growth estimate from 3.5% to something closer to 4%.
  • The yield on the 10-year Treasury fell below 2.45% this week. While common wisdom is that falling yields are a sign of slowing growth, other factors relating to demand may also account for some changes. We interpret these low bond yields and record high stock prices as a market signal that inflation will be subdued and economic growth will resume.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

May 23, 2014
  • The National Association of Realtors released its summary of existing home sales, showing an uptick, as sales rose 1.3% in April. Even better, new home sales increased 6.4% for the month as well, the largest increase since last October. Building permits rose 8% from last month, with most coming in the form of multi-family housing. The improved numbers helped to address the potential concerns that slowing housing could become a more protracted drag on the economy.
  • US equity markets are up about 1.5% for the week, as measured by the S&P 500; small caps are up more than 2%, as measured by the Russell 2000. This is a reversal in the trend from the last two months, as small caps have trailed the rest of the US market. Increased confidence in manufacturing and the housing numbers is believed to be pushing equities higher.
  • Inflation continues to ring in below the Fed's target. Breakeven inflation—the difference between Treasuries and TIPS of the same maturity—is still only slightly above 2% and in line with the longer run average. To us, this means that any real tightening by the Fed is expected to be in the distant future.
  • US interest rates remained relatively steady during the week, with the US 10-year Treasury trading around 2.52% and the 30-year rising slightly to 3.40%. We still see rates rising over the remainder of the year. However, we believe near-term uncertainty in the US economy and also related to international events has led to an increase in bond purchases by nervous investors.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

May 16, 2014
  • Both domestic and European yields on fixed income issues fell sharply this week. The bond market seems to believe that economic weakness may continue through the rest of 2014. In Europe, markets are anticipating some form of easing by the Central Bank and have been purchasing bonds ahead of potential announcements.
  • First quarter GDP is likely to be revised lower, taking it into negative territory. However, we expect the economy to rebound in the second quarter and believe we do not face the prospect of an imminent recession unfolding. We expect growth to return to around 2.5%–3.0%, which is roughly –0.5% below current consensus estimates. An expected pick-up in business investment (Non-residential Investment) is key to growth reaching the mid to high 2% range as we do not see big contributions from trade and government
  • Economic numbers from China suggest that that economy continues to slow. Declining credit growth has led to a –25% decline in building construction. Policymakers seem to be comfortable with a controlled and measured slowdown in the economy. The People's Bank of China instructed 15 banks to "improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers" to try to help spur credit creation and ease the slowing of growth.
  • We believe the European Central Bank will introduce credit measures in June or July. We think they will be creative in their easing but the change of course from Germany's central bank indicates to us that this will get done.
  • We agree with the Fed's recent comments that the slowing in housing activity could prove more protracted than previously thought. The run-up on home values over the last year, and the slight tightening in lending standards for mortgages, indicates that the economy in 2014 could get less support from this segment.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

May 9, 2014
  • The yield on the 10-year Treasury bond is near its one-year low, while the S&P 500 is near its high. A low yield often signals economic weakness, while high stock prices signal strength. Low inflation expectations explain the difference: 1 and 5 year expectations (based on breakeven rates) are at 1.5% and 2%, respectively. Bonds perform well when inflation recedes, driving yields lower; and a low rate / low inflation environment is generally positive for stocks.
  • Inflation is low in the Eurozone with year-over-year rates below 1%. The European Central Bank, led by Mario Draghi, indicated that it is likely to cut rates or take other stimulative actions in its next meeting in June. This sent the Euro down relative to other major currencies. Draghi has a reputation for using talk to move markets.
  • With inflation expectations low, housing starts and sales showing some weakness, and slack in employment, we expect the Fed, under Chair Yellen's leadership, to be cautious in withdrawing stimulus. The Fed's easy money policy has lowered mortgage rates to help home buying, but has paradoxically raised land prices—somewhat offsetting the need for new construction.
  • 93% of the S&P's market cap has reported earnings, which are up 5.9% from a year ago. The outlook for Q2 is positive, as current forecasts indicate acceleration in year-over-year nominal GDP growth. There's been less downward guidance for the next quarter than we've seen recently.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

May 2, 2014
  • We believe the top news for the week was the initial reports on U.S. and European GDP, both of which came in at lower than expected rates of growth. The U.S. experienced an annualized growth rate of only 0.1% in the first quarter—in part due to consumer spending growth slowing from a 3.3% growth rate in the fourth quarter of 2013. Europe is also showing slow growth, at 1% for the first quarter's GDP, and inflation at only 0.7%.
  • The payroll report out today was a nice improvement over early reports this year, showing the economy added 288,000 jobs in April. The good news is that things have continued to get better and therefore the Federal Reserve can be expected to make no changes to its current path. The bad news is these numbers don't improve the trend, but only adjust for the recent slow-down due to the weather—while the participation of people in the work force has continued to decline.
  • Equity markets have shown a little better life, with the Dow Jones Industrial Average hitting a new high and the S&P 500 flirting with one. This recent strength puts U.S. markets up about 2.5% for the year-to-date, and international equities up almost the same amount. Interestingly, bonds, as measured by the Barclays Aggregate, are also up about 2.9%.
  • Stepping back from all the data, we continue to see an improving economy, somewhere in the middle of an elongated recovery cycle. We believe that cash yields will remain below expected inflation into 2015 and perhaps beyond; bonds will earn more return than cash, but only barely earning a positive real rate when looking at the ten-year U.S. Treasury; and stocks should do better than bonds. With stocks we expect more volatility, making the rest of the year likely to reflect the first four months of 2014.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

April 25, 2014
  • 239 companies—representing almost 60% of the S&P 500's market cap—have reported earnings. Positive surprises are running about 3 to 1 with an average beat of 5.9%. The outlook appears unusually positive for the near term, and we find this satisfactory and supportive of current equity valuations.
  • Declining mortgage applications are casting a shadow on the strength of the housing recovery. While some of the decline reflects weak demand for refinancing, which doesn't have the impact of an initial mortgage, new home sales were also disappointing. We would expect GDP estimates to come down if the recent weakness in housing continues. Weaker housing reduces the pressure on the Fed to withdraw stimulus.
  • Tensions in the Ukraine continue to make the news. While the U.S. and EAFE stock market indices are close to flat year to date, the Russian index is off about 20%. People question whether ineffective responses in Syria and the Ukraine will embolden Russia and China. The President was compelled to assure Japan that we would come to its defense in the face of a strengthening China.
  • Overall, the markets have been quiet, with small moves in the stock market all week. Similarly, the 10-year U.S. Treasury yield hasn't moved much with the yield now about 2.66%.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

April 11, 2014
  • The S&P 500 fell 2.1% on Thursday, erasing what was left of this year's gains. On the same day the NASDAQ Composite Index had its largest slide since 2011. There was no specific news to explain the sell-off, but the media attributed it to concerns over earnings. As we enter earnings season, one must consider whether the recent weakness is a harbinger of news to come.
  • With earnings season kicking off, we will be following the releases closely for signs to indicate whether earnings growth is slowing or accelerating.
  • The yield on 10-year Treasuries fell toward 2.6%, the low-end of the 2.6–2.8% range in which it has traded since January.
  • According to the University of Michigan survey – which interviews households on their views of personal finances, business conditions, and buying conditions – consumer confidence rose in April. The index is near the higher end of its post-recession range.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

April 4, 2014
  • The Bureau of Labor Statistics released the latest jobs numbers this morning, stating that the economy added 192,000 new jobs during March. This number is in line with results for the last couple of months, but failed to show any rebound or catch-up from low showings in January and February. While the latest job number was enough to keep unemployment unchanged and markets relatively calm, it leads us to more questions. What is the underlying trend? What more can we learn from April's results?
  • The president of the European Central Bank announced yesterday the ECB's willingness to consider open market actions to address the sluggish expansion of Europe's economy. Since Europe has historically had a different relationship to economic financing than the U.S., relying more on bank lending than financial markets, we think the form of action could be the ECB buying loans rather than sovereign bonds. We still see Europe, excluding Germany, struggling with very slow growth and depressed pricing, while Germany has seen much better economic activity and increasing credit. The disparity between Germany and the rest of Europe makes the ECB's actions more difficult—and all the more important.
  • The U.S. news cycle this week now includes high-frequency trading as a topic, with the new Micheal Lewis book, and its hype, hitting the market. While we haven't had a chance to read the entire book, we think it is somewhat one-sided in its portrayal of markets and trading. Certainly, the increase in technology makes everything more complex; but we have seen benefits that include the narrowing of bid/ask spreads and an increase in market makers. While some have profited from this advance, most investors who buy and sell securities have also benefited, since we enjoy today the most liquid financial markets in history.
  • We will begin to see earnings reports in the next few weeks as companies tell us how the first quarter of the year progressed for them. From a financial viewpoint, we have seen interest rates, as represented by the 10-year US Treasury, remain relatively stable (near 2.70%) and, while volatile, stocks have eked out a gain for the year so far. We continue to view stocks as favorable relative to bonds—though not giving us anywhere near 2013 results—and continue to believe that economic growth and the consumer will continue to favor more growth-oriented stocks. We also think, as we mentioned above, that for now a bias to the U.S. is still prudent; we like the dividend yields on international stocks, but want to see a more sustained recovery before we jump into global stocks with both feet.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 28, 2014
  • U.S. consumer spending rose the most in three months due to an increase in personal incomes. The Reuters/University of Michigan Consumer Sentiment Index was down 1.6 points to 80, while the Conference Board's Consumer Confidence Index rebounded. Still, according to both measures, the longer-term trend is up.
  • Real GDP growth for last quarter was revised upwards to 2.6% year-over-year from 2.4% due to strong personal consumption expenditures.
  • New home sales fell 3.3% to a 440,000 annual rate, the lowest in five months, but about average for the last year or so. Existing home prices, based on the S&P/Case-Shiller index, rose in January, reaching their highest level since the spring of 2008.
  • Generally speaking, equities in developed markets have been relatively flat this month, while emerging market stocks have shown some life, rising about 3%. Meanwhile, the 10-Year U.S. Treasury Bond yield of 2.7% has not closed above 2.8% or below 2.6% all month.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 21, 2014
  • Global equities slumped after Janet Yellen's unexpectedly hawkish comments indicated that the Fed could raise interest rates "around six months" after it fully winds down QE, which is much earlier than expected. Yellen said the falling unemployment rate, which overstates the health of the economy, will not overly influence Fed policy. The Fed will cut bond purchases by another $10 billion a month.
  • Ukraine plans to pull its troops out of Crimea, effectively accepting Russia's annexation of the province. Ukraine will now fortify its eastern border with Russia, which has apparently been massing forces nearby. Meanwhile, EU leaders will look to agree on further sanctions against Russia at a summit that starts today.
  • Despite the above, the U.S. stock market is having a good week as investors digest positive economic news. The U.S. index of Leading Economic Indicators rose 0.5%, surpassing the Bloomberg consensus of 0.2%. Job market growth, climbing home values, and record stock prices are increasing household wealth and will contribute to confidence.
  • All but one (Zions Bancorporation) of America's thirty largest banks passed the Fed's annual stress test. Looking at the bigger picture, we note that measures of financial stress from Bloomberg and the St. Louis Federal Reserve are at pre-crisis levels.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 14, 2014
  • Janet Yellen will get to chair her first Federal Open Market Committee meeting this week. Expectations are solidly behind the view that no change will take place in the tapering program, as the Fed will likely cut their monthly purchases to $55 billion.
  • However, the Fed will likely find itself presiding over an economy that is showing more stress points than it had before. Winter weather is blamed for a lot of the recent weaker data; but we can't rule out other factors such as declining consumer confidence and slower hiring trends. We believe that economic growth in the first quarter will be close to 2%, but could rise towards 3% in the second quarter as we rebound from the winter doldrums.
  • The Crimean referendum on Sunday could spark more market volatility, as we expect to see a result that will call for a reunification of this area with Russia—action that further raises the stakes in this confrontation. Western allies have indicated they will not recognize this result, but they seem powerless to stop the potential transfer. More likely, the Kremlin response will be the one that dictates where we go from here. If Putin sees an opportunity to add to his gains by taking control of more sections of the Ukraine, this would likely put pressure on Western leaders to respond, provoking investors to perhaps seek more safety as this confrontation escalates.
  • Beyond the headlines in the Ukraine, we see a number of trends that could challenge investor confidence outside of the United States. While Germany is helping to lead the recovery in Europe, France continues to struggle along with a number of the periphery countries. Abenomics seems to be running out of gas as the policy initiatives have not all helped consumers in Japan—who are also facing a significant VAT tax increase. Chinese growth is difficult to judge, as authorities attempt to deal with the shadow banking system, corruption, and pollution issues.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 7, 2014
  • While all of us will be "Springing Forward" with our clocks this weekend, economists are hoping for their own version of moving ahead to a point where harsh winter weather is not distorting economic data. The Beige Book of economic conditions released this week highlighted that U.S. growth is falling behind the pace from the end of last year, with weather blamed for most of the problems, but not all. We are keeping an eye out for any other sources of disruption such as higher interest rates impacting housing.
  • The crisis in Ukraine dominated much of the news and led to dramatic market shifts both up and down during the past week. It seems unlikely that this crisis will end soon, as Russia seems determined to capture some portion of the Crimean region into its sphere of influence. As a result we have seen markets being buffeted by these events. So long as the escalations and provocations are centered on the Ukraine and don't bleed into larger relationships among the U.S., Europe, and Russia, we expect to find ourselves dealing with market volatility but no serious economic impairments.
  • The key data point for this past week was the employment report, which came in better than expected. Total non-farm job creation amounted to 175,000, ahead of the 149,000 expected by Bloomberg's economists. The unemployment rate moved up to 6.7%. Weather was a major deterrent for employment, leading to speculation that the number of job gains might have been considerably higher had the weather cooperated. While the higher unemployment rate may take some pressure off of the Fed to consider raising short-term interest rates, increases in wages of 0.4% last month and 2.2% over the past year have raised some eyebrows about building wage pressures.
  • Given the weather, emerging markets concerns, and now the Ukraine, the underlying synchronized global expansion story has been hard to find, but we still believe it remains the major driver of financial market performance, which dovetails with our allocations favoring equities and developed markets, while limiting our exposure to longer duration fixed income markets and emerging markets.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]






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