U.S. equities struggled last week as the S&P 500 was down approximately 1%.1 The weak jobs report released on Friday seems to indicate that the U.S. remains mired in a muddle-through economy. After a couple of months where signs were more positive, recent data is disappointing. Although the first quarter was relatively strong, we anticipate that the first and second quarters will average out to the 2% to 2.5% real growth we have been forecasting, with nominal growth under 5%.
The Big Question: What Can Be Sustained?
The latest softness in economic indicators probably means that more consolidation in the equity markets is required before we can advance beyond the recent all-time highs. During March, nearly all of the activity for the S&P 500 was within 1% of 1550. Equities may move lower due to deteriorating technical conditions and the possibility of weak first quarter earnings reports.
Weekly Top Themes
- Non-farm payroll rose by 88,000 jobs yet was below consensus:2 The numbers missed the mark by 100,000 jobs. Also, the unemployment rate fell to 7.6% from 7.7%. This report will likely reduce expectations that the Fed will end asset purchases early. While the weakness in the household job survey is concerning, we continue to believe the Fed support and sustained upswing in housing will create better job growth this year.
- The ISM Manufacturing Composite fell to 51.3 in March:3 The reading that measures acceleration in activity had jumped higher at the start of the year, and measures still show incremental growth but at a slower pace.
- The Bank of Japan exceeded market expectations:4 The Bank’s aggressive move aims to achieve its 2% inflation target within a period of two years. Achieving 2% inflation and persuading banks to lend will not be easy.
- President Obama will release a budget with components to raise revenues: An expected proposal includes limiting deductions to 28% for those individuals earning more than $250,000. Republicans are extremely unlikely to revisit the revenue question without broader entitlement reform or a grand bargain. We assume many of these items will not see the light of day.
- The Obama Administration will potentially make a decision on the Keystone Pipeline during the summer: We anticipate that the government will find the pipeline to be in the national interest and approve its construction.
Tempered Expectations for the Near Term
The uncanny similarity between the slowdown in equity markets from the first to second quarter and what has occurred over the past three years does raise the risk of a correction. It has not gone unnoticed that equities have performed remarkably well in the first quarter in each of the past three years, followed by poor performance in each of the second quarters. Some observers suggest that post-recession seasonal adjustment factors are artificially boosting the first quarter.
Over the past month, weak activity in Europe has supported our view that the recession will continue for the balance of the year. The chaos around the Cyprus bailout and Italian election is further evidence that the European region may not have what it takes to pull itself out of the recession any time soon.
Fears over a spring-summer relapse in the equity markets and the economy are running high, compounded by the several recent reports with weaker data. On a positive note, equity valuations do not appear stretched. However, unless global growth picks up, any further softening in key U.S. data will weigh on the U.S. equity market.
1 Source: Morningstar Direct, as of 4/5/13.
2 Source: Bureau of Labor Statistics, “The Employment Situation,” as of April 5, 2013, http://www.bls.gov/news.release/empsit.htm.
3 Source: March 2013 Manufacturing ISM Report On Business,® as of 4/1/13, http://www.ism.ws/ismreport/mfgrob.cfm
4 Source: Bank of Japan, “Introduction of the “Quantitative and Qualitative Monetary Easing,” April 4, 2013.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Euro STOXX 50 Index is Europe’s leading Blue-chip index for the Eurozone and covers 50 stocks from 12 Eurozone countries. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
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The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.
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