More signs of a slowing U.S. economy have appeared in the past week. Durable goods orders, for example, fell 1.4% in February, the category's third decline in the past four months. The Kansas City Fed Index also fell to a two-year low, to readings last seen in Feb 2013. But most troubling, the new orders component dropped to the second-lowest level since the Lehman Brothers crisis, and future capital expenditures (capex) expectations fell to a five-year low. Clearly some of this weakness reflects poor weather and the West Coast port shutdown. But it also appears to reflect uncertainty about future demand which has been exacerbated by a strengthening U.S. dollar, a trend which has big implications for Q1 earnings.
European equities snapped a lengthy run of weekly gains, with the Stoxx 600 losing 2.1% for the week after seven straight weeks of gains. In addition to general overbought conditions, the pullback in European markets was likely influenced by some newfound strength in the euro currency, which is up more than 4% from its recent lows on the heels of a dovish statement from the U.S. Fed and some bourgeoning evidence that Europe's economic growth is stabilizing.
For the week, the S&P 500 dropped -2.23%, the Dow Jones Industrial Average fell -2.29%, and the MSCI EAFE (developed international) decreased -0.69%.
Here are the 3 stories this week that rose above the noise:
Yellen Makes Case for Slow, Cautious Rate Rises after Liftoff
U.S. Federal Reserve Chair Janet Yellen said interest rates will probably be raised in 2015 but made the case for a cautious approach to subsequent increases that will keep borrowing costs low for years to come. In a speech last week in San Francisco, she emphasized that the coming tightening cycle will be unlike any other in recent times, as the U.S. economy continues to heal from the worst recession since the Great Depression.
Despite considerable anxiety regarding the timing of the first rate hike, Yellen played down the importance of when the Fed finally raises rates for the first time. She said "what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase."
Forecasters Shrug Off Winter Economic Blues
Several key economic indicators, including manufacturing activity and durable goods order, have been disappointing through the first few months of 2015. First-quarter GDP growth is also likely to disappoint, but according to a poll of 50 economists by the National Association for Business Economics (NABE), the U.S. economy will bounce back after a brief winter economic slowdown and grow at a 3.1% pace for 2015.
The U.S. economy has not experienced 3% GDP growth since 2005, but according to the NABE, may reach that level of growth this year because of "healthier consumer spending, housing investment, and government spending growth." In their view, improving labor market conditions and declining fuel prices will lead to a boost in consumer spending and help propel the U.S. economy to stronger economic growth.
China's stock market sure looks like a bubble
A recent article by Matt O'Brien of the The Washington Post examines some troubling evidence that the Chinese stock market has entered a new bubble. Although valuations do not appear to be in obvious bubble territory despite an 80% rise in stock prices over the past nine months, signs of froth are apparent.
For example, new stock trading accounts have surged in recent months and margin accounts more than doubled in 2014. With the Chinese economy slowing, real-estate prices falling, and overall debt continuing to grow at a potentially unsustainable pace, the possible unwinding of an equity market bubble adds to the growing risk associated with the world's second-largest economy.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
