Wednesday, November 27, 2013

Perspectives from Above the Noise – Week of November 25, 2013

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


Stocks climbed again as the S&P 500 and Dow notched their seventh straight week of gains on positive economic data. Optimistic economic data was behind a lot of the market movement last week. Initial jobless claims fell to their lowest level since the government shutdown; though seasonal factors may have affected the data, the four-week moving average (a less volatile measure) supports the trend.

For the week, the S&P 500 gained 0.37%, the Dow rose 0.65%, and MSCI EAFE (developed international) fell 0.01%.

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

Buying Stocks at Record Highs: Will You Be Sorry?

The Dow closed above 16,000 for the first time last week and there is a wide range of opinions about how attractive U.S. equities are at the current level. For example, billionaire hedge fund manager Carl Icahn is “very cautious” on U.S. stocks, while Warren Buffett feels that U.S. stocks are valued in a “zone of reasonableness.”

According to a recent blog post on Wall Street Journal.com, answering the question “How much can I stand to lose before I bail out?” is the key factor for investors sitting on the sidelines and interested in buying equities. Even if U.S. stocks are valued in a “zone of reasonableness,” external factors can drive stocks into a bear market, where 20 percent or more losses occur. The article states, “…the best indication of whether you can take such a big hit is what you did the last time something similar (bear market) happened. If, in 2008 and 2009, you bought more of any asset that fell in price, you are the rare investor whose intentions and actions may match. If you did nothing, you at least didn’t turn temporary losses into permanent ones by selling out at the bottom. If, however, you did bail out, then don’t fool yourself into thinking you won’t do it again.

Faucets at $1,000 Abound as Home Equity Spigot Opens

One impact of the recovery in housing prices that has occurred over the past two years is a recent resurgence in home equity lines of credit (Helocs). A Bloomberg article details evidence that homeowners are confident enough in home values and the job market to tap into the equity in the homes and banks are becoming more willing to make such loans.

While we don’t expect or wish to see a return to the excessive use of such loans that characterized the years leading up to the housing bust, a modest recovery in home equity loans does have positive near-term economic implications and may provide an economic tailwind in 2014 given the recent run-up in home values.

Market Sees Little Risk of Rising Short-term Rates

A posting on the Econbrowser blog provides a very good analysis of how the market seems to expect the next Fed tightening cycle to play out. Based on the forward curve, market participants are currently pricing in a very low probability that the Fed begins increasing short-term rates before 2015 and sees rates increasing much more slowly after that than they have in prior tightening cycles.

While the prospect of the Fed tapering its quantitative easing program in the coming months may increase financial market volatility, this analysis suggests the Federal Reserve’s communication policy has been effective in setting long-term interest rate expectations which may help limit the impact of its expected tapering announcement.

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