Perspectives from Above the Noise – Week of September 23, 2013

3 Stories in the global economy that should not go un-noticed 

Despite weeks of hints and rumors, the Federal Reserve did what few analysts expected at last week's FOMC meeting and decided not to taper their bond-buying program - at least for right now. Markets moved up last week on news that the Federal Reserve will delay tapering until economic data improves. Despite some end-of-week jitters about Washington's debt ceiling debates, the major indices all closed in the black.

For the week, the S&P 500 grew 1.3%, the Dow gained 0.5%, and the Nasdaq increased by 1.4%.

Here are the 3 stories this week that rose above the noise:

U.S. Housing Recovery Continues

Home prices in 20 U.S. cities rose in the 12 months through July by the most in more than seven years, helping boost owner equity. The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent from July 2012, matching the median projection of 31 economists surveyed by Bloomberg and the biggest year-to-year advance since February 2006, according to a report from the group issued today. Gains in home and stock values are contributing to increases in household wealth that are helping bolster consumer spending, the biggest part of the economy.

Republicans Debt-Ceiling Strategy Relies on Obama Budget

In the past few days market participants have begun to pay some attention to the potentially ugly political fight developing in Washington over funding the government and raising the debt ceiling. Up to now, global financial markets have exhibited limited concern that a prolonged government shutdown or technical default on U.S. debt is a likely outcome.

A Bloomberg article details an optimistic scenario which may explain some of the market’s apparent complacency. In this scenario, part of the sequester spending cuts which took effect earlier this year would be replaced with modest long-term entitlement reform. This general framework appears, at this point, to have some bipartisan support.

However, should it become apparent in the coming weeks that there is not enough common ground to pass a debt limit increase without intense last-minute negotiations, market volatility is likely to increase significantly during October.

Emerging Market Tourist Spend Boosts U.S. Travel

Increasing wealth in emerging market nations is providing a boost to the U.S. economy and tourism industry. Tourists from emerging nations including China, India, and Brazil are increasingly travelling to the United States with an emphasis on shopping for consumer goods and luxury items during their stay.

Currently, the level of products and services purchased by international tourists within the United States is at an all-time high and reached $14.9 billion in June. Overall, the number of tourists visiting the United States has increased by 6.4 percent over the last year and spending rose by 10.6 percent, according to the U.S. Department of Commerce.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of September 16, 2013

3 Stories in the global economy that should not go un-noticed

As tensions over Syria decreased significantly with the U.S. and Russia agreeing on a proposal to eliminate Syria’s chemical weapons arsenal, markets closed out a solid week boosted by the diplomatic solution and hopes that a big tapering move by the Fed may be avoided.

For the week, the S&P 500 gained 1.98%, the Dow rose 3.04%, and the Nasdaq grew 1.70%.

Here are the 3 stories this week that rose above the noise:

Fed’s Taper Should Start Small

In a recent article, PIMCO’s Mohamed El-Erian provides his views on how the Federal Reserve is likely to exit from quantitative easing programs. In El-Erian’s opinion the process will begin this week with the announcement of a small reduction in asset purchases.

However, the article also provides some compelling reasons why the Fed’s process of winding down its unconventional programs might be a multi-year endeavor with the Fed looking to minimize any negative impact on financial markets. The entire article provides a nice summary of how Fed policy is likely to evolve in the coming months.

China’s Industrial Production Output Rises 10.4% in August

The world economy received some good news last week as China’s industrial output grew at the fastest pace in 17 months as the recovery in the world’s second largest economy gains traction. Factory production rose 10.4 percent from a year earlier, topping all 45 analyst estimates whose projections ranged from 9.2 percent to 10.2 percent.

Separately, UBS AG said China’s liquidity and credit squeeze appears over. Further positive economic news out of China included a 13.4 percent increase in retail sales, while fixed asset investment increased 20.3 percent in the January-August period, both topping estimates.

Manufacturing Rebound Led by Autos Supports U.S. Growth

U.S. industrial production increased in August by 0.4 percent, which is the fastest growth in six months. The acceleration in industrial production was led by a strong increase in auto and housing-related output. The strong industrial production data comes on the heels of impressive Institute for Supply Management manufacturing data in July and August and may set the stage for an acceleration of GDP growth in the third quarter.

According to Deutsche Bank Economist Brett Ryan, “manufacturing should be a pretty decent contributor to growth over the second half of the year. You have an elevated level of unfilled orders, so that bodes well for production.”

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of September 9, 2013

3 Stories in the global economy that should not go un-noticed

Last week, investors reacted nervously to sabre rattling between President Obama and Russian President Putin over the Syria predicament. Markets ended the short week in the black despite sustained volatility as traders worried about escalating tensions in the region and the prospect of an end to the Federal Reserve’s economic stimulus.

For the week, the S&P 500 gained 1.36%, the Dow climbed 0.76%, and the Nasdaq rallied 1.95%.

Here are the 3 stories this week that rose above the noise:

Bonds Still Belong in Your Nest Egg

The recent pronounced weakness in the bond market has deservedly received an enormous amount of coverage in the mainstream press. An article from The Wall Street Journal provides some perspective on why bonds should still play an important role in many portfolios as well as providing some historical context on how the broad bond market has held up during prolonged periods of rising interest rates.

As noted in the article, the interest-rate risk of a bond portfolio can be reduced by shortening the duration of the holdings and bonds are likely to continue to be helpful in offsetting some of the volatility associated with stocks.

Unemployment Falling for Wrong Reason Creates Fed Predicament

Last week’s employment report received mixed reviews, with a falling headline unemployment rate a positive data point that was offset by a continuing drop in the labor force participation rate. A recent Bloomberg article provides a good summary of the important impact the participation rate has on the headline unemployment rate.

As noted in the article, there is growing belief among economists that a substantial portion of the drop in the participation rate is due to structural forces that will not be reversed, most notably an aging workforce. However, the degree to which part of the decline in participation is cyclical and will rebound with the economy has important implications for future Fed policy.

Economists Expect 3% Growth in 2014

The U.S. economy grew by 1.1 percent in the first quarter and 2.5 percent in the second quarter, but economists surveyed by the National Association of Business Economics predict that U.S. economic growth will decelerate to 2.3 percent growth in the third quarter before accelerating to 3 percent GDP growth in 2014.

Employment growth is expected to increase marginally, from a monthly increase in nonfarm payrolls of 180,000 per month this year to 199,000 in 2014. Additionally, the economists surveyed place a 45 percent probability that the Federal Reserve will begin scaling back its third round of quantitative easing this year because of the projected modest improvement in the economy and labor market.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of September 2, 2013

3 Stories in the global economy that should not go un-noticed

Markets ended the last trading day of August in the red, with the Dow and S&P 500 posting their worst monthly declines since May 2012. Trading was slow on Friday as worries about the escalating Syria situation and the Fed appear to have discouraged some investors.

For the week, the S&P 500 lost 1.84%, the Dow lost 1.33%, and the Nasdaq lost 1.86%.

Here are the 3 stories this week that rose above the noise:

Giant Reality Check

Concerns remain over the extent of bad debts in China’s banking system. Official data on non-performing loans puts China’s bad debts at 1 percent of bank assets but there is a lot of skepticism over that number. Morgan Stanley estimates a more realistic figure may be 10 percent for all banks and 6 percent to 8 percent for the biggest.

Positively, since China’s sovereign debt is a relatively low 30 percent, it has the potential to absorb bad debts in its banking system (as it has in the past). The implications of reduced lending from China’s large banks to the country’s state-owned enterprises may be shifting in the years ahead. One potential silver lining: loans to small companies and households, which together made up just 22 percent of the total in 2006, are forecast to soar to 57 percent of all loans by 2021, according to McKinsey Consultancy.

As Summers’s Odds Rise, Stimulus Easing Is Seen

One significant uncertainty that markets face in the coming months is the looming nomination of the next chairman of the Federal Reserve. There is an increasingly popular view that President Obama will nominate Larry Summers to succeed Ben Bernanke, and a recent article from The New York Times details some reasons why this speculation may be creating market volatility and contributing to the recent rise in interest rates.

Specifically, Summers’ views on current monetary policy are unclear and his past statements have expressed some skepticism over the Fed’s quantitative easing programs. The uncertainty concerning future monetary policy which has contributed to recent market volatility is unlikely to subside in the near-term and this article details some reasons why the nomination of Summers may unsettle financial markets more than the nomination of someone who is more closely aligned with the Fed’s current policies.

Euro-Area Manufacturing Expands on Surge in Italy, Spain

Manufacturing activity in Europe expanded for the second consecutive month, rising to a 26-month high in August. Economic activity in Europe is continuing to stabilize, following a six-quarter-long recession that ended in the second quarter. Growth in manufacturing activity has been broad-based as several countries including Germany, Italy and Spain are experiencing their fastest growth in manufacturing in over two years. Additionally, economic confidence in Europe rose to a two-year high last month.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.