The beauty of low expectations is that there’s a lot more upside than downside.
In a month known for stock-market disappointment, equities got a big boost last week. In fact, the Dow Jones Industrial Average turned in its best weekly performance since January.
Why the celebration? It seems investors entered September with less enthusiasm because of the many market obstacles: mounting tension in Syria, increased odds of Fed tapering, a potential budget showdown in Washington and signs of slowing growth in emerging economies, especially China. In addition, September has historically been the worst month for both the Dow and the S&P 500. So it’s no surprise that investors had a dim view at the outset.
However, so far, many of the potential headwinds have shifted to tailwinds. There seems to be a resolution to the US dilemma in Syria. And data released last week shows improvement in economic growth in China. Further, investors seem to be getting comfortable with the possibility of a tiny taper in September. The market reminded me of a quote from Alexander Pope, “Blessed is he who expects nothing, for he shall never be disappointed.” Not only are investors not disappointed, but they actually seem pleasantly surprised.
Pricing in a Pullback?
But we’re only halfway through September and consumers seem discouraged. The latest poll from the University of Michigan and Thomson Reuters showed a drop in their consumer sentiment index. In particular, the expectations component showed significant weakness, falling to 67.2, the lowest reading since January, when concerns abounded about the payroll tax and its impact on purchasing power. While this report is only the mid-month reading, it’s still cause for concern. Equally troubling is consumers’ 12-month economic outlook, which fell dramatically.
It seems that the weak job recovery and rising rates—mortgage refinancings are down 71% since May—are taking their toll on consumers. We’ve seen more data to support that view in the past week. August retail sales rose a tepid 0.2%—well below expectations—with the sole pocket of strength coming from auto sales. Meanwhile, September consumer credit showed lackluster growth. We also saw a continuation of the longstanding trends of non-revolving credit expanding and revolving credit contracting. Consumers remain cautious, which many economists and strategists would argue means that the economic recovery will have short legs.
Better Balance Sheets
Still, the good news is that pessimism has helped make the consumer more fiscally fit; consumers have decreased the debt on household balance sheets and prudently made “personal cap ex” purchases such as cars and education. In addition, many consumers are enjoying lower debt-servicing costs as a result of the lower interest-rate environment. Their gloomier outlook for the economy might ultimately be a positive sign—if their expectations are exceeded. That’s because a more discerning consumer could be a coiled spring. If the Fed tiptoes into tapering or holds off on tapering mortgage-backed securities until later, which could lead to lower mortgage rates, then consumers might be pleasantly surprised and loosen their purse strings.
Similarly, if businesses substantially increase their pace of hiring—as indicated by the latest NFIB Small Business Optimism Index—they might begin to spend more aggressively. After all, watching the stock market’s progress this month suggests there’s something to be said for low expectations.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
A Word About Risk: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585, us.allianzgi.com, 1-800-926-4456.
AGI-2013-09-16-7703
© Allianz Global Investors
