U.S. stock indices have recouped their losses from January’s emerging-market-led selloff and are once again flirting with fresh all-time highs. The release of the minutes from the Fed’s Jan. 28-29 meeting, the last one chaired by Ben Bernanke, made some interesting headlines. The Fed attributed much of the decline in labor-force participation to demographic shifts rather than cyclical weakness in the economy. That’s important because it would seem to support the Fed staying the course on scaling back its monthly bond buying over the course of this year.
The minutes did not reveal a great deal of concern over economic slowdown, and the Fed Atlanta Fed President Dennis Lockhart said later that he was “looking through” this winter’s soft-patch of economic data. It appears that only dramatic economic deterioration would cause the Fed to change its taper course. But very muted consumer inflation readings gives the Fed ample flexibility to fine-tune its policies.
For the week, the S&P 500 lost 0.13%, the Dow dropped 0.32%, and the MSCI EAFE (developed international) added 1.57%.
Here are the 3 stories this week that rose above the noise:
Why This Is Not 'a Mature Bull Market'
We are in the sixth year of the current bull market that began in 2009. Only a handful of bull markets have made it into their sixth year and JPMorgan’s Chief U.S. Equity Strategist Tom Lee feels this bull market still has legs and explains why he feels it is not a mature bull market. In Lee’s view, several factors will provide longevity to this bull market including aging infrastructure that needs replacement, record consumer wealth, historically low borrowing costs, and retail investors returning to stocks. Lee mentions several positive long-term catalysts for U.S. equities, but equities have been volatile in 2014 and that trend may continue throughout the year because of stretched equity valuation, Fed tapering, emerging market growth concerns, and recent weakness in U.S. economic data.
Greed Turning Losers to Leaders in Russell 1000 Index
Several metrics we follow that are designed to measure investor sentiment entered 2014 indicating a potentially excessive level of optimism. A Bloomberg article details another sign of frothy investor sentiment which is the recent outperformance of speculative and non-profitable companies. We view this as another anecdotal indication that greed and overconfidence has returned to equity markets which increases the risk of a market correction in the coming months.
Home Prices in 20 U.S. Cities Increase at Slower Pace
U.S. home prices increased 13.4% over the trailing 12 months ending December 2013, a slight deceleration from the 13.7% increase in the 12 months ending November 2013. Price appreciation is slowing as rising mortgage rates combined with harsh winter weather cool home purchases over the past few months. Positively, smaller increases mean more homes will remain affordable as the labor market improves, helping maintain the rebound in residential real estate that has boosted growth.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
