Monthly Archives: January 2014

Market Insight’s 1/30/2014

Markets Rebound

The domestic equity markets closed the trading session higher, as stocks were able to bounce back from yesterday’s sharp declines on the heels of a plethora of corporate earnings reports and data that showed 4Q GDP growth inline with estimates. In other economic news, weekly jobless claims rose more than expected, while pending home sales fell more than anticipated. Treasuries were mostly lower following the domestic data.

The Street was treated to a large serving of domestic earnings reports, of which, Facebook and Under Armour were standout winners after both easily topped the Street’s quarterly projections, while Qualcomm and Visa also advanced in the wake of their profit reports. Dow member 3M Co offered mixed results, while fellow Dow component Exxon Mobil missed expectations.

The Dow Jones Industrial Average moved 110 points (0.7%) higher to 15,849

The S&P 500 Index advanced 20 points (1.1%) to 1,794

The Nasdaq Composite increased 72 points (1.8%) to 4,123

In moderate volume, 652 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.87 to $98.23 per barrel, wholesale gasoline was flat at $2.67 per gallon

The Bloomberg gold spot price decreased $24.13 to $1,243.21 per ounce

First look at 4Q GDP matches forecasts, while jobless claims rise more than expected

The first look, of three, at 4Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 3.2%, after 3Q’s 4.1% growth, and inline with most street forecasts.

The growth in GDP primarily reflected positive contributions from personal consumption, exports, nonresidential and private inventory investments, along with state and local government spending, partially offset by negative contributions from federal government spending and residential fixed investment, while increased imports subtracted from the GDP calculation. Most analysts believe the trend for economic growth will gain momentum in 2014, led by a fading fiscal drag, as well as continued strength in housing and a pick-up in business capital spending.

On inflation, the GDP Price Index rose 1.3%, from the 3Q’s 2.0% advance, and compared to the anticipated 1.2% increase, while the core PCE Index, which excludes food and energy, rose 1.1%, matching expectations, and following 3Q’s 1.4% growth.

Weekly initial jobless claims rose by 19,000 to 348,000 last week, above the 330,000 expectation, after the prior week’s upwardly revised 329,000 figure. Moreover, the four-week moving average, considered a smoother look at the trend in claims, increased by 750 to 333,000, while continuing claims declined by 16,000 to 2,991,000, south of the 3,000,000 forecast.

Treasuries were mostly lower following the data, with the yield on the 2-year note nearly unchanged at 0.35%, while the yields on the 10-year note and the 30-year bond increased 2 basis points to 2.69% and 3.64%, respectively. Yields regained some of yesterday losses that stemmed from the emerging market concerns and the decision by the Federal Reserve to continue to scale-back its monthly bond purchases.

Tomorrow’s domestic economic calendar will yield readings on personal income, anticipated to increase 0.2% m/m in December, and personal spending, expected to also have grown 0.2% m/m. Also on tap, the Chicago Purchasing Manager Index is forecasted to tick slightly lower in January to a level of 59.0 from the 59.1 posted in December, with a reading above 50 denoting expansion in activity. As well, the final University of Michigan Consumer Sentiment Index for January will be released, with a reading of 81.0 expected, up slightly from the preliminary report of 80.4.

European stocks mostly positive, Asia sees pressure

The European equity markets finished mostly higher, aided by the rebound in the U.S. following a wide variety of earnings and economic reports. Traders digested yesterday’s announcement from the U.S. Federal Reserve to reduce its monthly asset purchases by another $10 billion to $65 billion. However, gains were held in check by the continued concerns toward the emerging markets, exacerbated by a report confirming that China’s manufacturing output contracted for the first time in six months.

In economic news in the region, Spain’s 4Q GDP expanded 0.3% quarter-over-quarter, matching expectations, while German unemployment change fell more than expected and a separate report showed the nation’s consumer prices fell for January.

Stocks in Asia finished broadly lower as concerns toward the emerging markets continued to fester, despite recent actions by central banks to try to stabilize the currency markets, while the Fed stayed the course with its asset purchase reductions yesterday. Japanese equities were under pressure, as yesterday’s rally in the yen weighed on export-related issues, and sentiment was exacerbated by disappointing Japanese retail sales data for December. In China, the final January HSBC/ Markit Manufacturing Index confirmed the first contraction in output for the sector since July.

The action in China came ahead of tomorrow’s beginning of the Lunar New Year holidays, which will have the mainland Chinese markets closed for a week. South Korean markets were closed for the Lunar New Year holiday.

The international economic docket for tomorrow will be dominated by a plethora of reports out of Japan. Items set to be released by the island nation include: Markit manufacturing data, housing figures, construction orders, the jobless rate, CPI data and industrial production figures. Additionally, we will receive retail sales data from Germany, consumer spending figures from France, a consumer confidence reading from the UK and CPI data for the Eurozone.

U.S. Economy Grows 3.2% at end of 2013

The U.S. economy expanded rapidly in the final three months of 2013, as consumers shrugged off a government shutdown, with the data fueling hopes of even faster growth ahead. The total value of all goods and services produced by the economy, known as gross domestic product, grew at a 3.2% annual pace in the fourth quarter, the Commerce Department said Thursday. Economists polled by MarketWatch had forecast a 3.3% gain. Leading the way was the biggest burst of consumer spending in three years and a snap-back in business investment. Sharply improved exports also added to the glow.

GDP Graph

The only major blip in the GDP report — and one that bears watching — was the softest patch of spending in the housing market in 14 quarters. Builders turned a bit cautious in the waning months of 2013 as rising home prices and higher mortgage rates put off would-be buyers. And rates could rise even more in the months ahead. However, the economy’s strong year-end performance follows on the heels of a 4.1% growth rate in the third quarter. Taken together, the two periods combined to post the biggest back-to-back increase in growth since end of 2011 and start of 2012.

The largely positive report is sure to stoke fresh hopes the economy is ready to move into a higher gear after more than four years of a ragged growth following the Great Recession. Corporate profits are high, households are in better financial shape and the days of market-rattling financial battles in Washington might be over, at least for the next year.

The fourth-quarter report card also appears to justify the Federal Reserve’s decision on Wednesday to scale back an economic-stimulus program for the second time in two months. The bank said the economy continues to improve and that it expects hiring to pick up. Read more on the Fed’s decision.

Another key test awaits next week, however, with the release of employment gains for the first month of 2014. The January jobs report should help determine if the puny 74,000 increase in December was a fluke. The kindling U.S. economy cannot truly catch fire until businesses step up their pace of hiring and put back to work the millions of Americans who still cannot find jobs.

For the full year the U.S. economy grew 1.9% compared with 2.8% in 2012.

Inside fourth-quarter GDP

The most promising sign in the waning months of 2013 was a surge in consumer spending, the source of more than two-thirds of the nation’s economic growth. Spending jumped 3.3%. Americans also spread out their purchases. Spending on services rose 2.5% while outlays for long-lasting goods such as autos, cars and computers advanced 5.9%. Although consumers not be able to keep up hat pace of spending, the increase was the fastest since the fourth quarter of 2010 and easily surpassed the 2.2% average since the recession ended.

Businesses also got off the sidelines, boosting investment on equipment by 6.9% after a paltry 0.2% increase in the third quarter. Companies will have to continue to increase investment if the economy is to sustain its recent growth trajectory, but they won’t do so unless consumer demand remains strong.

One sign that they don’t expect a big retreat in consumer spending was the amount of inventories they stockpiled for future sale. Businesses increased inventories by $127.2 billion, even faster than the $115.7 billion buildup in the third quarter. Normally firms stockpile goods at a much slower rate if they think sales will level off.

Exports, meanwhile, also registered sharp fourth-quarter growth. Exports surged 11.4% and imports grew at a much slower 0.9% pace. One reason: The U.S. is returning to its historic role as a major producer of petroleum and it’s importing less from other nations.

The only drags on the economy in the fourth quarter were housing and government spending. Spending by the federal government, meanwhile, fell 12.6% largely because of the prolonged government shutdown in October. The decline was partly offset by higher spending at the state and local level.

Why the Emerging-markets Crash Doesn’t Matter

At WT Wealth Management we have minimal exposure (4% or less) to Emerging Markets even in our most aggressive portfolio’s, but never the less it’s in the news and we like to keep our investors informed. Here’s our take while it’s overblown and this to will pass, like most things in the financial markets.

Perhaps an emerging-markets crash does not matter nearly as much as investors seem to think. Why not?

There are three reasons. First, while most are huge exporters, few are major importers, except of raw materials. So even if they slow down, it will not hit the developed world. Second, falling currencies will help them rebalance their economies, and export more, not destroy them. Finally, while there are inevitable storms along the way, most emerging markets are still growing very fast. China is expanding at 7.7% this year. Crisis-hit Turkey should grow at 4%. Overall, emerging markets growth is accelerating this year, not slowing down.

Panics over emerging markets are as inevitable as winter snowstorms. Smart investors will sit them out, and let them blow over — and selectively use them as a buying opportunity.

There were wobbles in the emerging markets at the close of 2013, but at the start of 2014 it has turned into a full-scale panic. All the emerging markets are now down for the year, and the impact of that has been felt in the developed world as well, with markets in the U.S. and Europe sharply down. The Istanbul Index is down from 74,000 last month to 64,000 this, and the rout has been a lot worse for foreign investors as the currency has gone into free fall as well. The Argentine index dropped by almost 4% on Monday alone.

Overall, the MSCI Emerging Markets Index lost almost 2% on Monday, even though it was already at four-month lows and the index has lost nearly 7% in January.

The decision by the Federal Reserve to start ‘tapering’ the amount of money it releases into the markets every month was the immediate trigger for the meltdown. Whether quantitative easing does much for a domestic economy remains to be proven one way or another. But what it certainly does is pump up the financial markets, and flood the world with easy cash. A lot of that money found its way into the emerging markets, usually in search of a higher yield than it could find at home. As the taps get turned off, it is hardly surprising that indexes that soared on foreign investment start to fall. But none of that means there has been any long-term damage done.

Here are three reasons why:

First, even if there is a crisis in the emerging markets, it will not impact the U.S. or Europe very much . Why? Because they export stuff to us, not the other way around. Take China, for example, by far the biggest of the emerging markets, and a nation that is now a major part of the global economy. Only 0.7% of British GDP is made up of sales to China. In fairness, the British are not very successful in that market. Apart from Land Rovers, we don’t seem to make many things the Chinese want. But it doesn’t matter very much to most developed economies either. Just 0.9% of the U.S. GDP is generated from sales to China, and even for Japan, the figure is only 2.4%. It matters a lot to Australia — 5.8% of its GDP depends on China, nearly all of it raw materials — but to no one else. If China slows down, its factories won’t stop exporting — that will be the only healthy part of the economy. And it won’t make much difference to developed world exports because they are so small. The global economy won’t feel much impact from a Chinese slowdown — and a lot less than people fear.

Second, the currency collapses are part of the solution, not a problem in itself . Take Turkey, for example. It is one of the most successful emerging markets of the last decades, with the kind of rapid growth rate that has enabled it to triple income per capita in only a decade. But as foreign money has flooded in, a big trade deficit has opened up, and with the currency dropping that may be hard to finance. South Africa is a similar story, although with less rapid growth. But hold on. Where there is a trade deficit, a devaluation of the currency is the simplest solution, at least according to every economics text book I have ever seen. As the currencies of countries like Turkey, South Africa and indeed Argentina slide, exports should increase. That will strengthen their economies over the medium-term, not weaken them.

Finally, growth in the emerging markets is not slowing down — it is accelerating . The IMF last week forecast the emerging markets would grow at 5.1% this year, compared with 4.7% in 2013. China is expected to grow at 7.7% this year — hardly a crisis by anyone’s standards. Even hard-hit Turkey is expected to expand by 4% over the next twelve months. Too optimistic? Not really. The euro-zone has stabilized, at least for the time being, which will help Eastern Europe and Russia and Turkey. The U.S. is growing faster than at any time since the crash, which will help South America. So long as China can stay on course, it will carry on lifting the whole of Asia. Emerging Africa remains one of the fastest-growing regions in the world, and shows few signs of slowing down.

True, a panic in the emerging markets may hit the financial sector. No one would be very surprised to learn that a hedge fund — or a German bank — had been burnt investing in high-yield Turkish debt, or some Argentinian currency derivative so complex no one can understand it. As countries industrialize there will always be wobbles along the way. But if the weakness persists there will be buying opportunities, and smart investors will use them to their advantage.

Market Insight 1/28/2014

Markets’ Bounce Back

Eased concerns over China and a stabilization in emerging market currencies helped to pause the declines seen over the last few days, while investors shrugged off a surprising drop in U.S. durable goods orders. A stronger-than-expected domestic Consumer Confidence report added support, while separate releases showed U.S. home prices rose again and regional manufacturing activity continued to grow. Gains for the Nasdaq were kept in check as technology stocks came under pressure following softer-than-expected iPhone sales and disappointing revenue guidance from Apple.

The Dow Jones Industrial Average moved 91 points (0.6%) higher to 15,929

The S&P 500 Index gained 11 points (0.6%) to 1,793

The Nasdaq Composite rose 14 points (0.4%) to 4,098

In moderate volume, 620 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.69 to $97.41 per barrel, wholesale gasoline gained $0.01 to $2.64 per gallon

The Bloomberg gold spot price declined $2.86 to $1,255.25 per ounce

Durable goods orders surprisingly fall, while Consumer Confidence tops forecasts

Durable goods orders were down 4.3% month-over-month in December, compared to the 1.8% increase that was expected by economists surveyed by Bloomberg, and November’s 3.5% jump was revised to a 2.6% rise.

The disappointing report saw broad-based declines, led by manufacturing, computers and electronics categories, as well as the volatile transportation segment, while orders for machinery and appliances managed to post gains. The data also suggested business investment—which has fallen for three of the past four months—remained subdued to close out the year.

However, we feel caution has reigned in many corporate board rooms since the financial crisis of 2008. Certainly, executives have had numerous reasons to postpone spending. However, that can only go on for so long as technology improves and existing systems and equipment wears out and becomes obsolete. In this globally competitive environment, companies need to constantly improve on their existing efficiency and productivity.

With the uncertainties such as fiscal problems in the U.S. and the European crisis easing, we believe 2014 will be remembered as one where business confidence grew and spending returned. As a result, we believe that areas of the economy poised to gain from these expenditures will benefit, such as stocks in the technology and industrials sectors.

The Consumer Confidence Index topped expectations in January, improving from a downwardly revised 77.5 in December, to 80.7—the highest level since August 2013—and compared to the 78.0 reading that economists had anticipated. The stronger-than-expected read on sentiment came as both components pertaining to the current situation and expectations of business conditions gained ground.

In housing news, the 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 13.7% y/y in November, versus the 13.8% increase that economists had expected. Moreover, m/m, home prices were higher by 0.9% on a seasonally adjusted basis for November, compared to forecasts of a 0.8% increase.

Treasuries pared losses on the durable goods data to finish nearly flat, as the yield on the 2-year and the 10-year notes ticked 1 basis point lower to 0.34% and 2.75%, respectively, while the 30-year bond rate was unchanged at 3.67%.

Tomorrow’s U.S. economic calendar will not reach its pinnacle until the 2:00 p.m. ET monetary policy decision by the Federal Reserve, which will bring an end to the Ben Bernanke era as Chairman, and usher in Janet Yellen’s reign. Economists expect the Fed to shave off another $10 billion from its monthly bond-buying program, known as quantitative easing, to $65 billion. Any changes to its forward guidance pertaining to the timing of its first interest rate increase or acknowledgement of the recent volatility in the emerging markets are likely to garner some attention on the Street.

Europe higher as emerging market concerns stabilize

The European equity markets finished higher, amid stabilizing emerging market currency concerns, aided by actions by central banks to help combat the recent sell-off in the foreign exchange markets, highlighted by an unexpected rate hike in India. Spanish stocks benefitted the most from the eased emerging market uneasiness, which overshadowed the disappointing U.S. durable goods orders report. Moreover, Italy conducted a favorable debt auction of zero-coupon notes, showing its borrowing costs drop to record low, per Bloomberg. In economic news, U.K. 4Q GDP data showed the economy expanded at the highest rate since 2007, while Italian consumer confidence improved more than expected for January.

Stocks in Asia finished mixed amid some caution ahead of tomorrow’s U.S. Fed monetary policy decision, while elevated concerns toward emerging markets and China were relatively held in check. However, liquidity concerns eased a bit as the People’s Bank of China injected more funds into the financial system and news that investors in a high yield trust were bailed out, per Bloomberg. The tempered financial concerns in China helped overshadow a report showing y/y growth in the nation’s industrial profits for December slowed compared to the previous month. Finally, the Reserve Bank of India unexpectedly raised its benchmark interest rate, aimed at combating inflation pressures and the recent drop in the rupee.

Market Insights 1/27/2014

Caution Start to Week

U.S. equities finished the first trading day of the week lower in choppy action, as investors remained cautious toward China and emerging markets. Also, everyone is looking ahead to Wednesday’s monetary policy decision by the Federal Reserve. The dampened sentiment overshadowed better-than-expected earnings and guidance from Dow member Caterpillar, which also initiated a $10 billion stock repurchase program.

Treasuries gave back some of last week’s gains, while the domestic economic calendar offered a decline in new home sales and a slight uptick in regional manufacturing activity.

The Dow Jones Industrial Average decreased 41 points (0.3%) to 15,838

the S&P 500 Index lost 9 points (0.5%) to 1,782

The Nasdaq Composite was 45 points (1.1%) lower at 4,084

In moderate volume, 776 million shares were traded on the NYSE, and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.92 to $95.72 per barrel, wholesale gasoline lost $0.04 to $2.63 per gallon

The Bloomberg gold spot price declined $15.06 to $1,255.00 per ounce

New home sales drop and regional manufacturing activity continues to expand

New home sales fell 7.0% month-over-month in December, to an annual rate of 414,000 units, from November’s downward revision to a 445,000 unit pace, from the initially reported 464,000 rate. Economists surveyed by Bloomberg had expected a 455,000 rate for last month. However, the recent cold snap throughout most of the country may have impacted the December figures.Northeast, which were down 27.6%.

Many experts, ourselves included, would likely view a decent sized pullback as a relatively healthy pause in an ongoing secular bull market and would caution against trying to time around it. Our optimism is rooted in several key themes, including: an improving U.S. economy, a likely healthy earnings season, a still-extremely accommodative Fed, reduced fiscal drag, stabilizing global economic growth, and outsized corporate cash balances that we believe will feed into better capital spending this year. However, one area of modest economic concern is the housing market. After a stellar rebound over the past couple of years, housing gains have started to moderate, as they should given recent strong gains in sales and prices. But we are watching closely the impact of higher mortgage rates.

In regional manufacturing news, the Dallas Fed Manufacturing Index showed activity for the region accelerated at a slightly faster rate than expected, improving from December’s upwardly revised level of 3.7 to 3.8 in January compared to the 3.3 figure that was forecasted. A reading above zero denotes expansion in activity. The report showed new orders jumped, while growth in production and employment accelerated modestly.

Treasuries finished lower, as the yield on the 2-year note rose 1 basis point to 0.34%, the yield on the 10-year note increased 5 bps to 2.77%, and the 30-year bond rate gained 4 bps to 3.68%.

Tomorrow, the domestic economic calendar will yield the release of durable goods orders, expected to rise 1.8% m/m in December, after increasing 3.5% in November, while excluding transportation, orders are projected to grow 0.6%, after gaining 1.2% in the previous month. Moreover, orders for nondefense capital goods excluding aircraft, considered a good proxy for business spending, are estimated to increase 0.3% last month, following the 4.5% jump registered in November.

Looking past the month-to-month volatility, we believe the trend for economic growth will gain momentum in 2014, led by a fading fiscal drag, as well as a pick-up in business capital spending. Caution has reigned in many corporate board rooms since the financial crisis of 2008. Certainly, executives have had numerous reasons to postpone spending. However, that can only go on for so long as technology improves and existing systems and equipment wears out and becomes obsolete.

In this globally competitive environment, companies need to constantly improve on their existing efficiency and productivity. With the uncertainties such as fiscal problems in the U.S. and the European crisis easing, we believe 2014 will be remembered as one where business confidence grew and spending returned. As a result, we believe that areas of the economy poised to gain from these expenditures will benefit, such as stocks in the technology and industrials sectors.

Consumer Confidence will be reported, expected to tick lower to a level of 78.0 for January from the 78.1 posted in December, as well as the S&P/CaseShiller Home Price Index, forecasted to show the 20-city composite increased 13.80% y/y during November, while declining 0.8% on a seasonally-adjusted m/m basis, and January’s Richmond Fed Manufacturing Index, anticipated to remain at the level of 13 that was posted in December, with a reading above zero denoting expansion in manufacturing activity.

Europe pressured despite upbeat German business confidence, Asia continues lower

The European equity markets finished lower amid the festering global economic uneasiness, exacerbated by recent disappointing data out of China, while concerns continue regarding the impact of the recent sell-off in emerging market currencies. The dampened global sentiment overshadowed a favorable read on German business confidence. The German Ifo Business Climate Index, derived from a survey of 7,000 corporate executives, rose to 110.6 in January—the highest since July 2011—from 109.5 last month, and compared to the 110.0 level that economists had anticipated. Meanwhile, U.K. stocks saw heavy pressure following a plethora of corporate news in the region.

Stocks in Asia finished broadly lower on the heels of Friday’s sharp sell-off in the U.S. as lingering economic concerns toward China following last week’s disappointing manufacturing report weighed on sentiment. Moreover, continued uneasiness amid a sell-off in emerging market currencies hamstrung stocks in the region. Meanwhile, Japan’s Nikkei 225 Index saw solid pressure in the wake of last week’s rally in the yen to highs not seen since early December versus the U.S. dollar, also hampered by a report showing the nation’s trade deficit widened to a record for 2013, due to higher energy import costs as the yen came under pressure during the year.

Items set for release on tomorrow’s international economic calendar include: import price data from Germany, 4Q GDP from the U.K., and consumer confidence from Italy. In central bank action, the reserve Bank of India will meet, with no change to its policy expected.

Market Insight 1/24/2014

Stocks Sink in Sea of Red

The domestic equity markets posted sharp losses, with the Dow losing triple digits, the S&P 500 closing under 1,800, and the Nasdaq down over 2% as global sentiment was dragged down by lingering Chinese economic concerns and a sell-off in emerging market currencies. Treasuries rallied on the global uneasiness, while the domestic economic calendar was void of any major releases today. Gold was modestly higher, while crude oil prices were mixed and the U.S. dollar was flat.

The Dow Jones Industrial Average (DJIA) decreased 318 points (2.0%) to 15,879

The S&P 500 Index lost 38 points (2.1%) to 1,790

The Nasdaq Composite was 91 points (2.2%) lower at 4,128

In moderately heavy volume, 920 million shares were traded on the NYSE, and 2.5 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.68 to $96.64 per barrel, wholesale gasoline was unchanged at $2.67 per gallon

The Bloomberg gold spot price rose $4.29 to $1,268.41 per ounce

For the week, the DJIA decreased 3.2%, while the S&P 500 Index declined 2.9%, and the Nasdaq Composite Index was 2.3% lower

Treasuries continue to rally amid global cautiousness

Treasuries were higher as global sentiment remains cautious, exacerbated by Chinese economic growth concerns following yesterday’s disappointing read on manufacturing activity, and currency sell-offs in the emerging markets. Meanwhile, the economic calendar offered no major releases today. The yield on the 2-year note declined 2 basis points to 0.34%, the yield on the 10-year note dropped 5 bps to 2.73%, while the 30-year bond rate fell 4 bps to 3.64%.

Courtesy of the flared-up China and emerging market concerns, the equity markets are poised to post another week in red figures and continue the disappointing start to 2014. Meanwhile, the domestic economic calendar was relatively light for the week, with existing home sales coming in slightly below expectations, while jobless claims rose by a smaller amount than expected, the Index of Leading Economic Indicators remained in positive territory, and manufacturing reports pointed to expansion in the sector. However, earnings season continued to roll on, with a majority of companies that have reported results thus far out of the S&P 500 topping profit and revenue estimates, according to data compiled by Bloomberg.

Most experts would likely view a decent sized pullback as a relatively healthy pause in an ongoing secular bull market and would caution against trying to time around it. The street remains optimistic that 2014 will end up being a positive one for equities, rooted in several key themes, including: an improving U.S. economy, a likely healthy earnings season, a still-extremely accommodative Fed, reduced fiscal drag, stabilizing global economic growth, and outsized corporate cash balances that we believe will feed into better capital spending this year.

With less drama, but more complacency, earnings season may take on added importance, especially forward-looking guidance by corporate leaders. Heading into fourth quarter earnings reporting season, expectations were relatively muted and it wouldn’t be a surprise to see lowered estimates beaten at a higher-than-average rate. Given how much valuation has expanded over the past two years, earnings will likely have to shoulder more of the market’s heavy-lifting this year.

Europe and Asia broadly lower as global sentiment remained uneasy

Stocks in Europe and Asia finished mostly to the downside, in the wake of yesterday’s disappointing Chinese manufacturing report that suggested the first contraction for the sector in six months, fostering concerns about slowing growth of the world’s second-largest economy. The recent sell-off for emerging market currencies weighed on sentiment, due mainly to political unrest in some countries, along with eased foreign exchange controls in Argentina, exacerbated by the Chinese growth concerns and the Federal Reserve beginning to normalize its highly-accommodative monetary policy.

Economic data in Europe was relatively subdued, with reports showing Italian retail sales coming in flat for November and Spanish wholesale price inflation rebounding last month. The hampered global sentiment boosted the yen to the highest level since early December versus the U.S. dollar, weighing on Japanese stocks. China’s Shanghai Composite Index rebounded from yesterday’s declines supported by property-related stocks and the more easing of credit crunch concerns as money market rates continued to move lower in the wake of recent liquidity injections into the financial system by the People’s Bank of China.

Fed meeting on tap next week

Earnings season will continue in full force next week, to be joined by an economic calendar that will be headlined by the two-day Federal Reserve’s Open Market Committee meeting, which will conclude with release of the statement following the meeting mid-day on Wednesday. The meeting will be the last meeting chaired by Ben Bernanke before handing the reins over to Janet Yellen, but will be the first meeting that reflects the annual rotation of voting members. The Bloomberg consensus of economists is expecting the Fed to announce that the monthly pace of bond purchases will be “tapered” again, reduced by another $10 billion to $65 billion a month. There is no press conference or economic forecast released scheduled for this meeting.

The Fed could be a source of speed bumps in 2014, as the Fed plans to rely more heavily on its communication tools to try to guide the markets’ expectations as it pulls back on bond buying. However, Fed tapering and the use of forward guidance as a primary driver of policy are still in their infancy, so it remains to be seen how smooth the transition will be. Fed membership composition is also in transition, which raise the potential for a less-than-smooth transition phase. We could not find a time in history when there have been so many personnel changes among the Fed’s voting members at any one time. Investors should be prepared for volatility as the markets adjust to the new Fed in 2014.

Other U.S. releases will include new home sales, Dallas Fed Manufacturing Activity, durable goods orders, the S&P/CaseShiller Home Price Index, Consumer Confidence, the Richmond Fed Manufacturing Index, the first reading on fourth quarter GDP, pending home sales, personal income and spending, the Chicago Purchasing Manager Index, and the final University of Michigan Consumer Sentiment Index reading for January.

Market Insights 1/23/2014

Far East Data Sends Equity Markets Spiraling South

The domestic equity markets closed sharply lower, as global growth sentiment soured in the wake of a report out of China that suggested the first contraction in manufacturing activity in six months.

Treasuries were higher amid the concerns about a slowing Chinese economy, which overshadowed an upbeat eurozone business activity report and a smaller-than-expected rise in U.S. jobless claims. In other domestic economic news, existing home sales missed forecasts, leading indicators rose at a smaller pace than anticipated, and manufacturing activity reports suggested expansion. In earnings news, Dow member McDonald’s and Netflix topped the Street’s profit projections, along with eBay, which also rejected a proposal from activist investor Carl Icahn to spin off its PayPal business.

The Dow Jones Industrial Average declined 176 points (1.1%) to 16,197

The S&P 500 Index decreased 16 points (0.9%) to 1,828

The Nasdaq Composite was 24 points (0.6%) lower at 4,219

In moderate volume, 768 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.59 to $97.32 per barrel, wholesale gasoline was $0.02 lower at $2.66 per gallon

The Bloomberg gold spot price advanced $25.58 to $1,262.73 per ounce.

Existing home sales softer than expected, while jobless claims come in below forecasts

Existing-home sales rose 1.0% month-over-month in December to an annual rate of 4.87 million, slightly below the 4.93 million unit estimate, and November’s figure was revised lower to a 4.82 million unit pace from the originally reported 4.90 million pace. The median existing-home price rose 9.9% from a year ago to $198,200. The supply of homes available for sale equated to 4.6 months of supply at the current sales pace. Single-family home sales gained 1.9% m/m, while multi-family fell 5.0% m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

While 2013 was the strongest year for existing-home sales in seven years, there was some loss of momentum in December. Lawrence Yun, economist at the National Association of Realtors that releases the report, cited the impact of adverse weather, disappointing job growth, limited inventory and “fast-declining affordability” for the slowdown in December. First-time buyers accounted for 27% of purchases, as the NAR cited “strict new mortgage rules” impacting sales. The median time on the market jumped to 72 days from 56 days the month prior, reflecting the impact of harsh weather.

Elsewhere, weekly initial jobless claims ticked higher by 1,000 to 326,000 last week, below the 330,000 level that economists had expected, as the prior week’s figure was downwardly revised by 1,000 to 325,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, fell by 3,750 to 331,500, while continuing claims rose by 34,000 to 3,056,000, north of the forecast of economists, which called for a level of 2,925,000.

Treasuries rallied, with the yield on the 2-year note declining 4 basis points to 0.36%, the yield on the 10-year note dropping 9 bps to 2.78%, and the 30-year bond rate falling 8 bps to 3.68%

Europe and Asia pressured by disappointing China report

The European equity markets finished broadly lower on the heels of a report suggesting the first contraction in Chinese manufacturing activity in six months, which overshadowed an upbeat read on Eurozone business activity. The preliminary Eurozone PMI Composite Index—a gauge of activity in both the services and manufacturing sectors—improved to 53.2 in January, from 52.1 in December, and compared to the 52.5 level that economists had anticipated. The upbeat report was led by stronger-than-expected growth out of the German manufacturing sector, along with slightly smaller-than-expected contractions for business activity indexes out of France.

Stocks in Asia finished mostly to the downside in the wake of the disappointing read on Chinese manufacturing activity. The preliminary HSBC/Markit Flash Manufacturing PMI Index fell to 49.6 for January, from 50.5 in December, and compared to the 50.3 reading that economists had projected, with a reading below 50 denoting a contraction in output. The preliminary manufacturing report was the first reading below 50 in six months. South Korea’s Kospi Index was lower following the Chinese data, which overshadowed a report that showed South Korea’s 4Q GDP grew by 0.9% quarter-over-quarter, matching expectations.

Market Insights 1/22/2014

Markets Mixed

The markets closed the trading session in mixed territory as Wall Street digested another serving of earnings reports and some light economic data. Treasuries were lower as the lone release on today’s economic calendar revealed a rise in mortgage applications.

In earnings news, Dow members IBM and United Technologies bested analysts’ earnings projections, but fell short on the revenue side. Texas Instruments exceeded analysts’ forecasts, while the chipmaker also announced cost-saving initiatives, including the elimination of 1,100 jobs, but issued a soft 1Q earnings outlook. Coach fell short of the Street’s forecasts and posted a sharp drop in same-store sales for the holiday shopping season. Investor Carl Icahn disclosed that he has purchased an additional $500 million in shares of Apple in the last two weeks.

The Dow Jones Industrial Average declined 41 points (0.3%) to 16,374

The S&P 500 Index added 1 point (0.1%) to 1,845

The Nasdaq Composite was 17 points (0.4%) higher at 4,243

In moderate volume, 629 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil increased $1.76 to $96.73 per barrel, wholesale gasoline was $0.06 higher at $2.68 per gallon

The Bloomberg gold spot price fell $4.58 to $1,236.83 per ounce

Mortgage applications rise, economic calendar becomes focus

The MBA Mortgage Application Index increased 4.7% last week, after the index jumped 11.9% in the previous week. The rise came as a 9.9% gain for the Refinance Index more than offset a 3.6% decline for the Purchase Index. Moreover, the average 30-year mortgage rate fell 9 basis points to 4.57%.

Treasuries were lower following the data, with the yield on the 2-year note rising 2 bps to 0.40%, the yield on the 10-year note gaining 3 bps to 2.86%, and the 30-year bond rate increasing 1 bp to 3.75%.

4Q earnings season continues to be the focus, as the U.S. economic calendar is fairly light this week. Tomorrow, things begin to heat up with the headline event likely being the existing home sales report, with economists forecasting a 0.6% month-over-month rise for the month of December at an annual pace of 4.93 million units. Other releases on tap include: the preliminary Markit US PMI Index, expected to rise slightly to a level of 55.0 for January from the 54.4 level posted in December, with a reading above 50 denoting expansion in activity; weekly initial jobless claims, anticipated to move higher to a level of 330,000 from the 326,000 in the prior week; and the Index of Leading Economic Indicators, expected to have risen 0.2% m/m during December, coming off the surprising 0.8% jump seen in November.

The Kansas City Fed Manufacturing Activity Index will be released, with economists projecting a reading of 2 for January, after unexpectedly dropping to -3 in December, with a reading above zero indicating expansionary activity in regional manufacturing.

Europe lower, Asia mostly higher

The European equity markets finished mostly lower, as traders sifted through earnings reports in the U.S., as well as some mixed reports in the region. The U.K. unemployment rate fell to 7.1% in November, from 7.4% in the previous month, and compared to the decline to 7.3% that economists had expected. The jobless rate is just above the 7.0% threshold that the Bank of England had targeted for it to consider making changes to its record low borrowing costs. However, the BoE’s minutes from its monetary policy meeting earlier this month showed members “saw no immediate need” to increase rates “even if the 7.0% unemployment threshold were to be reached in the near future.” Analyst noted, it’s likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained.

Stocks in Asia finished mostly to the upside, led by a rally for Chinese stocks, as short-term money market rates continued to drop in the wake of yesterday’s liquidity injections by the People’s Bank of China, which eased concerns about a credit crunch in the nation. The Bank of Japan maintained its monetary policy stance and a report showed the country’s leading indicators for November were revised higher, while some modest strength in the yen capped gains for stocks in the region. Reports out of Australia showed that the nation’s consumer confidence deteriorated for January and the country’s 4Q consumer price inflation came in hotter than projected to dampen expectations that the Reserve Bank of Australia may ease monetary policy further.

Market Insights 1/21/2013

Dow Down Despite Solid Earnings

Stronger-than-expected earnings reports from Dow members Verizon Communications, Johnson & Johnson, and Travelers Companies were unable to move blue chips into positive territory on the first day of the holiday shortened trading week. The broader S&P 500 and the tech laden Nasdaq posted modest gains for the day. Treasuries finished nearly unchanged amid a slow domestic economic calendar. Gold and the U.S. dollar were lower, while crude oil prices traded higher.

The Dow Jones Industrial Average declined 43 points (0.3%) to 16,416

The S&P 500 Index added 5 points (0.3%) to 1,844

The Nasdaq Composite was 28 points (0.7%) higher at 4,226

In moderate volume, 752 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.38 to $94.59 per barrel

Wholesale gasoline was unchanged at $2.62 per gallon

The Bloomberg gold spot price fell $12.51 to $1,241.84 per ounce

Treasuries flat with the economic docket empty

Treasuries finished nearly unchanged, as the U.S. economic calendar offered no releases today. The yields on the 2-year and 10-year notes were nearly unchanged at 0.37% and 2.82%, respectively, while the yield on the 30-year bond dipped 1 basis point to 3.74%.

With 4Q earnings season remaining in the fore-front, the U.S. economic calendar will be somewhat sparse this week, with tomorrow’s docket only offering MBA Mortgage Applications. The headline report will likely be existing home sales.

Many analysts, managers and Wall Street insiders would likely view a decent sized pullback as a relatively healthy pause in an ongoing secular bull market and would caution against trying to time around it. We still remain optimistic that 2014 will end up being a positive one for equities, rooted in several key themes, including: an improving U.S. economy, a likely healthy earnings season, a still-extremely accommodative Fed, reduced fiscal drag, stabilizing global economic growth, and outsized corporate cash balances that we believe will feed into better capital spending this year.

Heading into fourth quarter earnings reporting season, expectations were relatively muted and it wouldn’t be a surprise to see lowered estimates beaten at a higher-than-average rate. Given how much valuation multiples have expanded over the past two years, earnings growth will likely have to shoulder more of the market’s heavy-lifting this year.

Modest moves in Europe amid mixed data, Asia higher on eased China concerns

The European equity markets finished near the unchanged mark, as traders digested some diverging earnings and economic reports in the region. The German ZEW Survey of investor and analyst economic expectations six months in advance declined to 61.7 for January, compared to the improvement to 64.0 that economists had projected, and from the 62.0 level that was recorded in December, which was a seven-year high.

Stocks in Asia finished higher with Japan’s Nikkei 225 Index advancing nicely, supported by some weakness in the yen, while the Bank of Japan began its two-day monetary policy meeting today. Stocks in China increased amid eased concerns about a credit crunch in the nation as the People’s Bank of China injected liquidity into the financial system today, adding to yesterday’s decision to deploy a short-term lending facility to help supply banks directly with cash. The advance in China follows this weekend’s reports that showed the nation’s 4Q GDP grew by 7.7% y/y, compared to the 7.6% expansion that economists had projected, but down from the 7.8% rise that was registered in 3Q.

China’s economic outlook remains to the downside in many experts opinion, most believe it’s likely Chinese growth concerns come to the fore again. However, many believe small changes in the absolute level of growth are less important than the quality of growth. Due to an ambitious reform plan outlined in late 2013, consensus is starting to believe that China could be entering the next phase of growth that is more sustainable. Meanwhile, valuations and investor sentiment on Chinese stocks are depressed and could rise – higher-quality growth typically commands a higher valuation. As a result, we are slowly starting to see international analysts starting to upgrading the Chinese stock market to a positive view, large caps in particular, within a neutral view on the overall emerging market stock universe.

U.S. seen on track for best growth since 2005

Growth is Back

Think the disappointing U.S. jobs report for December has dampened the optimism of economists about the new year? Think again.

Most economists think the dismal 74,000 increase in net hiring last month was a fluke caused by poor weather and seasonal-adjustment problems that will soon be revised away or prove to be an aberration.

The way those with a sunnier view see it, the road is clear for the U.S. to produce its fastest spurt of growth since the Great Recession. There’s no big crisis in Washington brewing, U.S. households are better off financially and businesses are raking in the profits. Nor are there any major global threats to the economy on the horizon. Consider the new forecast by top economists at the nation’s leading bank firms.

Many economists are predicting the U.S. economy will hit 3% growth in 2014 for the first time in nine years.

The forecast by the advisory panel of the American Bankers Association is no outlier, either. A rising number of economists predict the U.S. will meet or beat the 3% threshold.

So what makes 2014 different?

For starters, Washington is on track to pass budget bills to fund the government through the next two years and no new tax increases are coming down the pike. For the first time in five years Republicans and Democrats appear ready to play nice and avoid a wrenching fiscal fight that would undermine the economy again.

Of course, Washington may find other ways to hold back growth. Some economists fret the new health-care law could have a negative impact on hiring and spending. Others say the federal government has been too tardy to get behind the boom in U.S. energy production, depriving the economy of even more jobs and growth.

Still, the budget truce is expected to give businesses more confidence and allow them to better map out their spending, hiring and investment decisions for the next few years. That’s no small thing. Investment only rose about 2.3% in 2013, less than half the rate of the prior year. Economists believe the government shutdown in October and the bitter fight over tax rates at the end of 2012 kept companies largely on the sidelines. Business leaders might not like all the decisions coming out of Washington, but they hate uncertainty even more. The budget deal gives them certainty.

Against that backdrop, economists predict companies will more than double their investment in 2013 in equipment, machines, plants and the like. If so, that would further solidify the foundation for the economy to grow.

Trickle-down economics?

For American workers and millions of unemployed, that’s also a good thing. Lots of jobs tend to be created when companies raise investment. More people have to be hired to build new offices or to meet the increase in demand for business equipment such as computers or machine tools.

What’s more, companies usually have to offer higher wages to attract good workers as the pool of available labor shrinks. That also gives people who already hold jobs the ability to ask for higher pay or the leeway to go work some place else.

By and large, such an option hasn’t been available to most workers since the end of the 2007-2009 recession. Worried about losing their livelihoods, many Americans have stayed longer in the current jobs than they expected or have accepted meek increases in their yearly salaries.

To be sure, no one is predicting that worker paychecks will start looking like winning Powerball tickets. The average hourly wage of U.S. employees only rose a scant 0.2% in the past 12 months, adjusted for inflation. The pace of hiring would have to surge to trigger a steady rise in salaries.

Such a scenario is unlikely in 2014. The ABA economic panel, for example, projects hiring will climb to an average of 200,000 a month this year, just a little better than the roughly 180,000 average in both 2013 and 2012.

Still, even a modest improvement in hiring could put upward pressure on wages, help American families and brighten the nation’s outlook. The U.S. is projected to add at least 2 million jobs for the fourth straight year, pumping more money into the economy and moving it closer to its historical growth average of 3.3%.

How long it takes to get back there, however, is still a dicey question. And the soothing talk of economists has to be taken partly with a grain of salt. Economists on Wall Street and inside the Federal Reserve have repeatedly forecast faster growth at the start of each year since 2010, only to see those predictions dashed.

Potential pitfalls

What might lead to another disappointment in 2014? For one thing, the Fed’s move to end a massive economy-stimulus program by the fall could push interest rates higher and dampen resurgent sectors of the economy such as autos and housing whose sales are fueled by borrowing.

The labor market, for its part, has shown occasional bouts of weakness. Companies have boosted hiring in the first few months of each new year since 2011, only to cut back by summer.

What the nation needs is an uninterrupted period of strong job creation. As the dwindling number of bearish economists point out, more than 20 million people who want a good full-time job still can’t find one. That’s depressed wages for all Americans and gives companies the upper hand over its employees.

A large share of the 7.5 million new jobs created since 2010, what’s more, are in lower-paying industries such as retail or hospitality. Millions of American still have great trouble just making ends meet. See slide show on who hired in 2013 and what they pay.

The persistently soft labor market, in the bearish view, largely explains why the current recovery has been the weakest in the postwar era — and why boom times are still not just around the corner.