Perspectives from Above the Noise – Week of January 14, 2013

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

Markets were upbeat last week, closing positive for the second week in a row as traders digested the first fourth-quarter earnings reports and fresh economic data. The S&P 500 was pushed to a new five-year high, gaining 0.38%, while the Dow rose 0.4%, and the Nasdaq increased 0.77%. With equities at five-year highs, it’s time to start thinking about whether the fundamentals can support further upside. 

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

Bernanke Downplays Inflation Risk of QE3 

One of the primary concerns of the Federal Reserve’s recent bond-buying programs and zero-interest-rate policy is that the backdrop for significant future inflation is being set. Recently, many Fed governors have expressed their concern that the Fed has pushed prices of certain bonds to unsustainable levels.

However, Fed President Ben Bernanke recently responded to these concerns publicly saying he doesn’t believe “significant” inflation will be an issue, and the Fed has many tools to exit its current policy. Until unemployment and economic growth improve more, the Fed’s current policy will likely continue.

The Emerging-World Consumer Is King

In a recent article, The Economist highlights the growth of the global middle class over the next several decades, mostly from emerging markets. China and India only took a fraction of the time to double their income per capita relative to the U.S. and Great Britain during their rise to power, which has brought a sharp increase in the number of emerging-market consumers who have reached the middle class.

According to the Boston Consulting Group, as many as one billion Chinese and Indians will reach middle class status by 2020. Foreign firms, including Starbucks, Disney, and Louis Vuitton, have flocked to emerging markets to promote their brands to the growing middle class and capitalize on “the greatest increase in consumer purchasing power in history,” as The Economist states.

Information Technology Dividends Outpace All Others

In an indication of how much the market landscape has changed since the bubble of the late-1990s, the information technology companies in the S&P 500 are now paying more in dividends than companies in any other sector. This surprising fact was reported by Standard & Poor’s last week and detailed in this The New York Times article over the weekend.

As discussed in the article, the financial sector had been the largest dividend payer prior to the financial crisis and has recently been paying a rising share of S&P 500 dividends. As the large banks are allowed to increase dividend payouts from current low levels, it is likely financials will once again become the largest dividend-paying sector. Nevertheless, large technology companies have become important sources of dividend yield, which is quite a change from the bubble years.