3 Stories in the global economy that should not go un-noticed
Even as we share this week’s column with you, the events that unfolded last week in Massachusetts and Texas are still fresh in our minds. Our hearts will remain with the victims and their families, as well as the residents of Boston and West Texas, as they rebuild their lives from these tragedies.
Earnings drove much of last week’s selloff as major indices experienced their biggest drop so far this year. Although the earnings reported thus far have largely beat estimates, disappointing reports from a handful of companies had an oversized effect on markets. For the week, the S&P 500 lost 2.11%, the Dow fell 2.14%, and the Nasdaq trimmed 2.70%.
Here are the 3 stories this week that rose above the noise:
That Swooning Feeling
During the previous three years, the U.S. economy showed signs of strengthening in the first quarter, followed by weakening in the spring and summer. The Economist argues in a recent article that the U.S. economy may follow a similar path in 2013. U.S. manufacturing, retail sales, and employment data were all encouraging through the first two months of 2013 before weakening in March.
The author feels that the trend of the economy and stock market weakening in the spring and summer over the last three years is a coincidence, rather than a new seasonal pattern developing, as some economists feel is the reason. In 2010, the first Greek bailout occurred in May, the Arab uprising and Japan tsunami occurred in March 2011, and last year’s decline was partially weather related.
The culprit this spring, in the author’s opinion, is austerity, as both the $85 billion in budget sequestration and payroll tax increase went into effect during the first quarter, putting downward pressure on economic growth in the second quarter.
China’s Recovery Falters as Manufacturing Growth Cools
HSBC Holdings Plc and Markit Economics reported that China’s Purchasing Managers’ Index (EC11CHPM), which is based on a survey of purchasing managers in the manufacturing sector, came in at 50.5 points for April. This is above the level of 50 that separates expansion from contraction, but is markedly lower than the 51.6 points recorded for March.
This release adds to concerns that the pace of China’s overall economic growth may be faltering and is unlikely to pick up again during the current quarter. Orders for new exports contracted in April after a temporary rebound in March, suggesting external demand for China’s exporters remains weak. Last week, Goldman Sachs, Royal Bank of Scotland Plc and JPMorgan Chase & Co. cut 2013 GDP estimates 7.8 percent, in-line with 2012’s pace.
Dow 16,000!
The Barron’s cover story this week discusses the latest readings from its semiannual Big Money poll of professional investors. Notably, the poll finds the highest level of bullishness in the over 20-year history of the data. Remarkably, only 7 percent of respondents classified themselves as bearish on equities.
This survey is consistent with other investor sentiment surveys we have seen in recent weeks showing continued caution among individual investors and extreme optimism among institutional investors. On balance, the high level of investor confidence currently prevailing creates a potential headwind for equities in the second quarter until sentiment reverts to more normal levels.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
