With the economic calendar somewhat light and earnings season passing its peak, the coming week may present an opportunity for the market to take a breather after the wild ride of recent weeks. Expectations for the Fed’s first rate hike have been pushed out to the second half of 2015 following the market volatility of October and the comments of these officials will be scrutinized for any indications of a possible shift in the Fed’s thinking.
For the week, the S&P 500 rose +0.69%, the Dow Jones Industrial Average added +1.05%, and the MSCI EAFE (developed international) dropped -1.01%.
Here are the 3 stories this week that rose above the noise:
Budget Blues Fade as U.S. Fiscal Drag Ends After Election
Last week’s election results – which saw Republicans gain control of the Senate – paradoxically also may lead to a little extra spending from Washington. While the party opposes much federal spending as wasteful, it’s been more open to expanding military support. Moreover, states and cities are taking advantage of low interest rates to borrow money for roads, bridges and other infrastructure projects. Last year’s budget restraint was the strongest since the recession ended in June 2009, as Congress eliminated a payroll tax cut, raised income taxes on the wealthy and reined in spending.
The upshot is that the combined budgets of cities, states and the federal government will add 0.4 percent to annual growth in the fourth quarter of this year, after reducing it by 0.9 percent in the year-ago period, according to St. Louis based Macroeconomic Advisers. Over the next two years, state and municipal governments are expected to add about 300,000 jobs to payrolls, more than offsetting a probable 50,000 cut in the federal workforce, primarily from attrition in jobs not filled.
The Rise of Invisible Unemployment
While headline employment data has been generally solid throughout 2014, one troubling weakness that continued to show up in last week’s nonfarm payrolls report has been anemic wage growth. This article from The Atlantic provides a good summary of possible explanations for the weakness in wages, with the relative lack of improvement in the number of individuals working part-time for economic reasons an important indicator to watch in 2015.
The lack of wage growth has been a key factor in preventing concerns about an aggressive Fed tightening cycle from impacting investor sentiment and this article provides some evidence that wage growth may remain soft for the foreseeable future.
Full Housing Recovery May Not Happen Until 2018
The housing recovery still has a long way to go according to the most recent Zillow survey of 100 real estate professionals and economists. The consensus view is that home values might not reach their prerecession peak until 2018. The panelists place most of the blame for the slower-than-expected recovery on changing demographics and cash-strapped potential first-time homebuyers.
High student loan debt, rising rents, and strict lending standards are all cited as reasons why the housing market remains challenging for potential first-time homebuyers. The panelists predict that home values will finish this year 4.8 percent above 2013 levels and gain an average of 3.7 percent annually between 2015 and 2019.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
