Perspectives from Above the Noise – Week of December 2, 2013

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

Last week’s shortened Thanksgiving trading schedule did not slow the market’s continued advance, as the month came to a close. November was another strong month for the financial markets. The S&P 500, a benchmark of mostly larger companies, gained 3.05%-finishing the month with its eighth consecutive weekly gain, its longest such streak in nearly a decade.

International stocks meanwhile did not fare quite as well, with developed international markets up 0.17%. Emerging markets slipped last month, losing 1.45%. Bond prices also moved lower last month, as the overall bond market lost 0.37%. The 10-year Treasury yield finished the month at 2.75%.

For the week, the S&P 500 gained 0.06%, the Dow grew 0.13%, and the and MSCI EAFE (developed international) added 0.83%.

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

Kiplinger's Presents Economic Outlook for 2014

As 2014 rolls into sight, Kiplinger outlined its economic outlook for next year. It expects the U.S. economy to continue to slowly build momentum with GDP growth hitting 2.6% in 2014, compared to only 1.7% for all of 2013. U.S. unemployment is expected to fluctuate between 6.9% and 7.2% until mid-2014 although the U.S. economy should be able to reliably generate at least 200,000 jobs per month. Inflation is expected to tick up slightly to 2%. The housing recovery is expected to continue with existing and new home sales expected to rise 4% and 16% year-over-year, respectively. Business spending is projected to gain 4.5% and the U.S. trade deficit is anticipated to continue to narrow by about 5% due to reduced oil imports.

While the recovery from the punishing 2007-08 recession should remain the slowest since World War II, U.S. quarterly growth is expected to reach an annualized pace of 3% by mid-2014, making the economy more durable in the face of challenges that include policy uncertainty at home as well as soft growth among major trade partners.

Foreign Stocks for the Long Run

With U.S. equities outperforming foreign equities over the past year, we are often asked why include foreign stocks1 in a portfolio? A recent analyst’s article provides some statistical insight into the diversification benefits of owning foreign equity. "Although the returns of foreign stocks have not kept pace with U.S. stocks, and their risk was higher, a portfolio allocated to 70% in U.S. stocks and 30% in foreign stocks generated a higher risk-adjusted return than a portfolio of all U.S. stocks." The 70/30 U.S. to foreign stock ratio produces the highest risk-adjusted return from 1970 to Oct 2013.

Additionally, if there is a regression toward the historic mean, foreign stocks should do well in a relative sense. However, given the lack of predictability in knowing when foreign equities will outperform, inclusion of the asset class in a strategic asset allocation strategy seems a reasonable approach.

U.S. Manufacturing Sector Expands Much More than Expected in November

The Institute for Supply Management's (ISM) manufacturing index rose to 57.3 in November (above 50 signals expansion), ahead of 56.4 in October. U.S. manufacturing has increased six consecutive months and accelerated at its fastest pace since April 2011 in November. Moreover, the ISM new orders index and employment index increased at their fastest rate this year, which is a strong leading indicator for factory activity over the next four to six months. Global manufacturing is also expanding, but is lagging the strong acceleration that is occurring in the United States.

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