Closing Out 4Q 2013
Economic data was not the highlight of the quarter as many areas of CHIME saw more poor numbers than positive ones.
– Confidence saw little movement from the major indicators this quarter, while the weekly indicator showed a bit more volatility.
- The Good: Conference Boards’ consumer sentiment reading (up 3.7%)
- The Bad: Bloomberg consumer comfort reading fell and University of Michigan confidence reading was down.
– Housing stalled out last quarter as the data points were not in favor of the industry.
- The Good: Building permits increased last quarter.
- The Boring: New home sales fell (down 1K). Home prices were stagnant (Down 0.20%)
- The Bad: Existing home sales (down 23K). Housing starts (down 117K). Mortgage applications were weak. Pending home sales weren’t able to keep up with last year.
– Inflation didn’t throw us any surprises last quarter as we still want to see some inflation rather than declining prices.
- The Good: PMI (up 3.8%)
- The Boring: CPI & PCE both stayed basically flat
- The Bad: PPI ex food & energy declined on a year over year basis.
– Manufacturing’s seesaw tilted in the wrong direction this past quarter as many indicators showed some slowing.
- The Good: Capital goods (up slightly over last quarter). Capacity Utilization
- The Bad: Durable goods. ISM Manufacturing (down 5.8%). ISM non-manufacturing (down 2.6%).
– Employment data showed the most promise of all CHIME indicators as some positive trends emerged from the data points through the quarter.
- The Good: Nonfarm payrolls (up 91K). Private sector payrolls (up 76K). Initial jobless claims (down 33K). Underemployment rate (dropped to 12.69%).
- The Boring: Unemployment rate (stayed at 6.7%).
- The Bad: ADP employment change (down 52K).
Equity markets started on the quarter in a hole, but utilized both February and March to help claw out of the red and finish the quarter with positive returns.
– M&A was hot in Q1 with the dollar volume of deals reaching nearly $700 billion.
- Facebook buying WhatsApp and Men’s Wearhouse buying Jos. A Banks were just some of the highlighted deals.
– Crimea voted to join Russia causing global unease in Q1.
– There was much news surrounding signups for the healthcare marketplace, which reached its goal by the March 31st deadline.
– Fed Chairwoman, Janet Yellen, confused markets a bit after leaning one way with regards to rates during her first post meeting press conference and then changing course slightly in another speech.
– GM is under the microscope as faulty parts from past production have come back to bite the company in the butt.
– Microsoft named a new CEO who was quick to take action. Microsoft wasted no time to launch its office suite for the iPad; a hotly debated issue for a long time.
– Merck saw the best run during the quarter advancing 13.43%.
- Boeing had the worst quarter for Dow components as the stock fell 8.06% during Q1.
– Performance for the quarter through 3-31-2014:
- Dow down 0.15%, S&P up 1.81%, Nasdaq up 0.84%
- 10-year Treasury yield fell 31bps to 2.72%
- GLD up 6.45% and OIL up 3.72%
Storylines: The Past & Future
Bump, Set, ‘Volatility’ Spike…
Anxiety came back during this past quarter as the recently stagnant VIX index spiked 76% in January. As the markets showed some signs of weakness, investors became afraid. Although the January correction was short lived, the rapidness of the spike shows that many people continue to be on the edge of their seats despite returns in 2013. It shows that the slightest of worries is causing anxiety within the marketplace.
Really it is just resilience
Economic data wasn’t great, earnings weren’t game changing, global uncertainty reared its ugly head and the Fed continued to taper; however, despite all of this, markets were able to perform positively. After dropping 3.5% in January, the S&P 500 pushed the noise away to finish the quarter up more than 1.5%. Eventually market participants will override the resiliency and focus on fundamentals, but this may take a little longer as cash remains on the sideline and enters during small pullbacks.
Russian to more unknowns
With Crimea having voted to join Russia, much uncertainty remains with what Putin will do. Major country powers continue to threaten Russia to no real avail. Worries continue to surround whether Russia decides to go after more areas of Ukraine. Further uncertainty with this issue will cause global unrest and possible market unease, but the resilience seen has been a bit comforting.
A Fed’less’ Market
Currently the Fed is buying $55 billion in bonds and has been reducing this level by about $10 billion bonds per Fed meeting. Given this pace, Fed bond buying should be done by October. The markets have seemingly built in the anticipation of the Fed being out of the bond buying game, but the bigger question will continue to be how investors deal with a market with no Fed participation when hairier issues arise within the marketplace in coming months.
A Yield Surprise
It’s only one quarter, but analysts’ sure fire bet was that yields were going to be rising along the curve and they didn’t. Despite some unease from Fed comments and a continuation of tapering, yields on the 10 year treasury fell. Rising yields will be due to much greater nominal growth than we are currently seeing. Until then, it will be hard for yields to get much higher than the levels we have seen over the past 6 months.
The China Unease
China has played a vital role in the global markets and they are currently undergoing some challenges. Economic activity has been booming in China, but with some recent debt defaults, Chinese investors are beginning to be a bit concerned. The Chinese government had basically been implicitly guaranteeing investments for the Chinese, but with recent defaults investors are beginning to worry that this ‘guarantee’ is not guaranteed anymore. This will cause investment in China to slow and the reach of this could be felt outside of China’s borders, but signs don’t point to this being a concern just yet. This is an issue that definitely warrants monitoring.
The Final Word
The takeaway for us during Q1 was that the markets were very resilient. We continue to believe that a ‘healthy’ correction will occur this year. This will allow cash hoarders to re-enter the markets and spur another leg to this bull market.
The root cause and timing of a market correction is still unknown, but given the weak economic data that we received and minimal earnings growth it will likely come from some type of headline risks. China and Russia weren’t news stories heading into the year and when we look back at the cause of the correction, it won’t likely be something we are talking about today.
With the recent reaction in bond yields it still seems likely that during market volatility and low nominal growth bonds will serve a key purpose within portfolios.
More investors seem to be on edge heading into the second quarter, which means volatility will likely continue into Q2 and any correction should be music to bull’s ears.