Things remain positive in the U.S. Labor market data (jobless claims) beat estimates again as both labor market and credit market data continue their four-five month trend of improvement.
-Jim Kee, chief economist, South Texas Money Management
March 22, 2012
Things remain positive in the U.S. Labor market data (jobless claims) beat estimates again as both labor market and credit market data continue their four-five month trend of improvement. That helps to explain both rising consumer confidence and last week’s report of improving retail sales (sales were up for the second straight month). Notable in the retail sales data was an increase in building materials sales, which is a good sign for housing (Wells Fargo Securities). On the less impressive side of the ledger was Friday’s industrial production report, which indicated that industrial production was essentially flat in February despite strong reports from regional indices in New York (Empire State Manufacturing Index) and Philadelphia (Philadelphia Manufacturing Index).
-The industrial production report probably reflects a temporary fall-off of orders that were accelerated into the fourth quarter of last year, before the 100% expensing of capital purchases expired at year’s end. If so then it should be a temporary softening.
-The Fed also recognized that "strains in the global financial markets have eased" (Federal Reserve).
-The S&P 500 has gained over 20% over the past five months, one of the longest and strongest uninterrupted rallies on record (GaveKal). Pull-backs are “expected but not predictable,” in my opinion.
-U.S Treasuries have done well too, as bond prices are up 20% over the past year.
-We do expect interest rates to rise as the economy expands and credit markets continue to normalize. Finally, regulators are pushing banks and insurance companies to own more bonds. We continue to see high quality municipal bonds as being in the sweet spot for safety and yield.
-The Fed completed its annual bank stress tests last week (“Comprehensive Capital Analysis and Review”). 18 of 19 companies passed, which was expected, but the results were much stronger than anticipated.
- Bonds and stocks: But GaveKal also points out that, of the seven serious bear markets in bonds since 1982 (involving losses of 15% to 20% in 30 year Treasury prices), “not a single one of these major bond corrections has caused a bear market in equities.” Two have coincided with flat equity markets, while five have coincided with big equity gains. That’s consistent with research at Credit Suisse, which argues that the currently elevated equity risk premium should put a floor on any correction that might occur in the equity market, meaning most bad news is already priced in.
