Wednesday, July 3, 2013

Perspectives from Above the Noise – Week of July 1, 2013

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


Despite a spike in volatility, markets were still able to eke out gains last week. Friday also marked the end of the month and the end of the second quarter; though June ended in the red, equities closed out the second quarter in the black. This marks the third positive quarter in the last four. So far this year, the Dow has surged more than 13%, while the S&P 500 and Nasdaq have increased nearly 13% each.

For the quarter, the Dow gained 2.27%, the S&P 500 climbed 2.35%, and the Nasdaq rose 4.15%.

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

Earnings to Get More Scrutiny amid Taper Talk

A recent article from Marketwatch.com details some potential headwinds for stocks as we enter second-quarter earnings season. In addition to continued concern over potential Fed tapering of asset purchases, the article notes several reasons that second-quarter earnings and second-quarter outlooks may be challenged.

These earnings headwinds include the diminishing impact of stock repurchases, rising interest rates, continued sluggish economic growth and government spending cuts, and very weak revenue growth in the first quarter providing little momentum. Also of note is a high level of negative earnings pre-announcements in recent weeks.

While the recent market correction may have already priced in many of these risks, the potential earnings headwinds noted in the article suggest volatility may remain elevated as we head into second-quarter earnings season starting next week.

Slow-Motion U.S. Recovery Searches for Second Gear


The Wall Street Journal argues that the U.S. economy is poised to experience accelerated growth beginning in 2014, following four years of sluggish growth. Growth is expected to reach its highest level since 2005 next year according to several economists and the Federal Reserve increased its 2014 growth projection as well, based on improvements in the economy’s fundamentals.

Headwinds for the economy persist, including recent weak manufacturing activity and debt sequestration, but improvements in housing and employment, coupled with increasing domestic energy production, are providing optimism that U.S. economic growth will accelerate in 2014.

Bear in the China Shop

In its latest issue, The Economist details the recent credit crunch in China and growing concerns that the country is heading for a credit crisis similar to what the U.S. experienced in 2008. Although the recent signs of stress in interbank lending in China are concerning, the article highlights some key economic factors which suggest a full-blown financial crisis in China is unlikely anytime soon.

In particular, the article notes that China has a very high savings rate, in contrast to the United States in the years leading up to its crisis. The article also makes the important point that the largest Chinese banks are already state-owned, a situation which can lead to inefficient lending decisions but which also offers the opportunity for a speedy cleanup of the financial system.

Finally, the article notes that the current interbank lending crunch in China was caused by the central bank refusing to lend as it attempts to clamp down reckless lending. In the U.S., the interbank lending market froze because banks were not willing to lend to each other. These are important insights in understanding just how much risk the current credit crunch in China poses to the global economy.

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