{"id":923,"date":"2012-11-01T10:27:18","date_gmt":"2012-11-01T16:27:18","guid":{"rendered":"http:\/\/www.sunlakesofarizona.com\/blog\/?p=923"},"modified":"2012-11-01T10:27:18","modified_gmt":"2012-11-01T16:27:18","slug":"economic-notes-for-the-week-of-october-29th","status":"publish","type":"post","link":"https:\/\/dev.sunlakesofarizona.com\/blog\/2012\/11\/economic-notes-for-the-week-of-october-29th\/","title":{"rendered":"Economic Notes for the Week of October 29th"},"content":{"rendered":"

Durable goods orders<\/strong> rose more than expected in September, up +9.9% versus a consensus forecast of +7.5%.\u00a0 The underlying components, however, were mixed, as the transportation component (mostly aircraft orders) made the largest contribution to results.\u00a0 Ex-transportation, orders were up +2%, and the \u2018core\u2019 capital orders measure was flat on the month.\u00a0 Shipments were relatively weak, with those for core goods only rising +0.9% and revised down a bit for earlier periods.\u00a0<\/p>\n

The Richmond Fed manufacturing index<\/strong> came in weaker than anticipated for October, at -7 versus +4 for September and lower than the forecast similar level of +5.\u00a0 The report\u2019s composition was also softer, mostly in the areas of new orders and shipments; however, wages were improved slightly.\u00a0 Inflation also jumped to the highest levels in almost a year, a reflection on commodity price increases.<\/p>\n

<\/p>\n

New home sales<\/strong> rose +5.7% to 389k for September, higher than an expected +3.2% gain, although a few prior months were revised downward.\u00a0 The Southern U.S. drove the bulk of sales in the month, the Northeast and West contributed a bit, while sales in the Midwest declined.\u00a0 Pending home sales<\/strong>, on the other hand, were a bit weaker than expected, with a month-over-month-gain of +0.3% for September, which lagged the forecasted improvement of +2.5%.\u00a0 Regionally, the composition was similar to that of the new home sales report, with gains in the West, Northeast and South, while the Midwest lagged.\u00a0 This offsets some of the good news in the new home sales report and continues to demonstrate a choppy, slow-moving recovery.<\/p>\n

The Thomsen Reuters\/University of Michigan consumer sentiment<\/strong> index rose to a five-year high in October, up 5.5 points from last month to 82.6.\u00a0 Falling gas prices and better employment prospects appeared to be catalysts.<\/p>\n

Initial jobless claims<\/strong> came in at 369k for the week ending Oct. 20, which was just 1k or so below forecast, and 23k lower than the previous week.\u00a0 This result was right in line with the four-week moving average.\u00a0 Continuing claims<\/strong> for the Oct. 13 week were 3,254k compared to an expected 3,260k reading.\u00a0<\/p>\n

The Federal Reserve Open Market Committee<\/strong> met last week and the result wasn\u2019t too unexpected\u2014per our note earlier in the week.\u00a0 The policy outlook continues to favor accommodation and rates kept low through mid-2015 (despite the continuing dissent of Richmond Fed President Lacker, who disapproves of the use of timing language\u2014and we wouldn\u2019t disagree necessarily).\u00a0 The underlying fundamentals since the last meeting haven\u2019t changed dramatically, either\u2014as we continue to plug along at a slow pace, but just fast enough to keep ourselves out of trouble.\u00a0<\/p>\n

Speaking of growth, the advance\/initial estimate for the 3rd quarter Gross Domestic Product<\/strong> was published, and it was a bit better than expected\u2014a reading of +2.0%, versus an anticipated 1.8%.\u00a0 Private consumption expenditures and residential investment showed strength; however, business investment in structures was weaker while equipment\/software came in unchanged.\u00a0 The biggest surprises in the report appeared to be a slowing in private inventory accumulation (lower inventory stockpiling is usually a positive), as well a much stronger government spending (+13% growth in defense spending in the quarter), but these offset to some degree.\u00a0 The price index component rose +2.8% compared to an expected +2.1%, showing that some inflation has indeed crept its way in.\u00a0 The core price index was up +1.3%, right in line with target.<\/p>\n

Other than that, the report was not out of line with forecast.\u00a0 We\u2019ve been in a period of positive, but slow growth, and a 2% quarter is right in line with this.\u00a0 Expected growth for the fourth quarter is about the same 2%, based on estimates from several firms, so we don\u2019t expect radical improvements or deterioration for the rest of this year.\u00a0 This pace isn\u2019t slow enough to \u2018stall\u2019 and push us into further deceleration and possible recession fears, but not fast enough either, at least enough to get job growth going at a faster rate (what the government would ultimately like to see).\u00a0 While a high-profile report from a news standpoint, this may be a draw in terms of its election impact.\u00a0 Obama is certainly hoping for the strongest possible numbers as evidence of success in boosting economic growth, while Romney (as would any challenger to a sitting President) may benefit from continued weakness\u2014as it plays into a theme of current policies not working and needing change.\u00a0 It is no surprise that domestic economic conditions and employment play a big role for voters, since the livelihood of households takes precedence over foreign policy and other matters not as close to home.<\/p>\n

From the vantage point of history, economic performance is also in line with previous episodes of recovery in this type of \u2018special situation.\u2019\u00a0 Based on the work of Goldman Sachs and other academics in studying 200 business cycles in 14 nations over 140 years, \u2018normal\u2019 recessions have tended to result in a 2% drop in real GDP in the first year, followed by a catch-up back to that starting level in year 2 and marginal growth of 1.5% for the few years following.\u00a0 However, for more severe recessions after debt busts (as we just experienced), the initial drop in GDP is much larger for the first two years, and it takes us about five years to get back to the starting point.\u00a0 We appear to be following this track, so the slow speed in crawling out of this bust isn\u2019t entirely surprising.<\/p>\n

Market Notes <\/em><\/strong><\/p>\n\n\n\n\n\n\n\n\n\n
\n

Period ending 10\/26\/2012<\/strong><\/td>\n

\n

1 Week (%)<\/strong><\/p>\n<\/td>\n

\n

YTD (%)<\/strong><\/p>\n<\/td>\n<\/tr>\n

DJIA<\/td>\n\n

-1.77<\/p>\n<\/td>\n

\n

9.60<\/p>\n<\/td>\n<\/tr>\n

S&P 500<\/td>\n\n

-1.48<\/p>\n<\/td>\n

\n

14.26<\/p>\n<\/td>\n<\/tr>\n

Russell 2000<\/td>\n\n

-0.94<\/p>\n<\/td>\n

\n

10.99<\/p>\n<\/td>\n<\/tr>\n

MSCI-EAFE<\/td>\n\n

-1.87<\/p>\n<\/td>\n

\n

10.91<\/p>\n<\/td>\n<\/tr>\n

MSCI-EM<\/td>\n\n

-1.53<\/p>\n<\/td>\n

\n

8.11<\/p>\n<\/td>\n<\/tr>\n

BarCap U.S. Aggregate<\/td>\n\n

-0.02<\/p>\n<\/td>\n

\n

3.94<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n\n\n\n
U.S. Treasury Yields<\/strong><\/td>\n\n

3 Mo.<\/strong><\/p>\n<\/td>\n

\n

2 Yr.<\/strong><\/p>\n<\/td>\n

\n

5 Yr.<\/strong><\/p>\n<\/td>\n

\n

10 Yr.<\/strong><\/p>\n<\/td>\n

\n

30 Yr.<\/strong><\/p>\n<\/td>\n<\/tr>\n

12\/31\/2011<\/td>\n\n

0.02<\/p>\n<\/td>\n

\n

0.25<\/p>\n<\/td>\n

\n

0.83<\/p>\n<\/td>\n

\n

1.89<\/p>\n<\/td>\n

\n

2.89<\/p>\n<\/td>\n<\/tr>\n

10\/19\/2012<\/td>\n\n

0.10<\/p>\n<\/td>\n

\n

0.30<\/p>\n<\/td>\n

\n

0.77<\/p>\n<\/td>\n

\n

1.79<\/p>\n<\/td>\n

\n

2.94<\/p>\n<\/td>\n<\/tr>\n

10\/26\/2012<\/td>\n\n

0.12<\/p>\n<\/td>\n

\n

0.30<\/p>\n<\/td>\n

\n

0.76<\/p>\n<\/td>\n

\n

1.78<\/p>\n<\/td>\n

\n

2.92<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

We witnessed a rough week for equities, as poor results for blue chips DuPont and 3M early on and disappointing results from Apple later in the week led indexes lower, the latter due to its especially large weighting.\u00a0 The growth sectors of health care, technology and consumer staples led with the smallest declines, whereas materials and energy fell the most last week.\u00a0<\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n

We are in the midst of earnings season in the U.S., and although we wouldn\u2019t expect this stat from the fear-oriented headlines, as revenue and earnings estimates have continued to be revised downward, especially in the info technology sector, over 70% of 273 S&P companies that have reported so far have beaten their earnings estimates (while roughly only a third have beaten revenue expectations).\u00a0 Interestingly, in last quarter\u2019s season, S&P stocks tended to outpace non-S&P stocks on earnings release days; however, we\u2019ve seen a bit of a reversal this season, as investors have favored non-S&P names.\u00a0 This has been most pronounced in the materials and technology areas.\u00a0<\/p>\n

In the emerging market world, news from China has improved, as better-than-expected export and industrial production numbers alleviated fears of a deeper slowdown and uncertainty surrounding a political transition next month.\u00a0 Emerging market stocks performed negatively, in line with most broader indexes, but Asian stocks (with trade ties to China) tended to fare a bit better.<\/p>\n

Treasury interest rate spreads were virtually unchanged for the week, but long bonds gained due to the duration effect.\u00a0 \u2018Credit\u2019 tended to lag on the week, with negative performance for high yield and foreign debt generally.\u00a0<\/p>\n

Just a simple and quick example for clients who think bonds are always a foolproof safe haven from volatility… Say, rates fall a relatively minor 0.03%, multiplied by the long-bond\u2019s rough duration of 18 years = bond prices would rise about +0.5%.\u00a0 Of course, this also works in reverse.\u00a0 For the sake of argument, imagine economic growth is much higher than anticipated, so rates shoot up 0.50% (not unrealistic per what\u2019s happened several times over the last few years) x 18 year duration = bond prices drop -9%.\u00a0 This is a risk that\u2019s likely somewhat higher than many think and is worth protecting against.\u00a0 Floating rate is one way we do that.<\/p>\n

Asian REITs gained on the week, presumably due to the better sentiment in China (urban Hong Kong is a big part of that index).\u00a0 European and U.S. REITs were generally negative, with U.S. industrial and retail bringing up the rear\u2014on par with an economic risk-off week.<\/p>\n

Commodities in general were down for the week, in line with other risk assets.\u00a0 Economically sensitive energy and industrial metals were down -3%, while agricultural commodities and precious metals suffered less.\u00a0<\/p>\n

What determines how much we should pay for stocks?\u00a0 Are they still a good buy at this point?\u00a0 Looking at a variety of metrics, including a top-down ratio and bottom-up dividend discount model analysis, says yes.\u00a0 The P\/E of the overall market is about 14 (based on the current level of 1412 and 2012 earnings of roughly 100… a fairly simple calculation this year).\u00a0 Looking at earnings expectations of roughly 107 for 2013 gets us to a forward-looking P\/E of just over 13.\u00a0 Considering the median P\/E for the S&P is about 16 for the last 8 decades, that puts us at a discount of 12% and 18%, respectively.\u00a0 Warranted?\u00a0 Perhaps.\u00a0 But the market doesn\u2019t really \u2018care\u2019 about why<\/em> the ratio is what it is.\u00a0 History tells us that below-market P\/E\u2019s give us a better probability of success.\u00a0<\/p>\n

From the dividend discount model perspective?\u00a0 This is more sensitive to inputs like future growth rates and risk premiums, but we get a number here of approximately 15-25% undervalued.\u00a0 Again, this aren\u2019t exact science, but do give us a general guideline for whether stocks are in a category of \u2018overvalued,\u2019 \u2018fairly valued,\u2019 or \u2018undervalued,\u2019 and a bit of a hint of how much.\u00a0 We may have room to go in this market recovery if historical precedent is any guide.\u00a0 Clients giving up on risk assets because they don\u2019t feel good about the fiscal cliff or election results would be a big mistake.\u00a0 A place where valuations look even more compelling is the developed foreign world (namely Europe), but we will save that for another discussion.<\/p>\n

We wish our East Coast friends a safe few days in the midst of the extreme weather in that part of the country.\u00a0 Have a good week.<\/p>\n

Karl Schroeder, RFC<\/p>\n

Investment Advisor Representative<\/p>\n

Schroeder Financial Services, Inc.<\/p>\n

Sources:\u00a0 FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder\u2019s, Standard & Poor\u2019s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.\u00a0 Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return\/excluding dividends.\u00a0 Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.<\/p>\n

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.\u00a0 All information and opinions expressed are subject to change without notice.\u00a0 Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.\u00a0 Schroeder Financial Services, Inc. is a registered investment advisor.<\/p>\n","protected":false},"excerpt":{"rendered":"

Durable goods orders rose more than expected in September, up +9.9% versus a consensus forecast of +7.5%.\u00a0 The underlying components, however, were mixed, as the transportation component (mostly aircraft orders) made the largest contribution to results.\u00a0 Ex-transportation, orders were up +2%, and the \u2018core\u2019 capital orders measure was flat on the month.\u00a0 Shipments were relativelyRead more<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-923","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/923","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/comments?post=923"}],"version-history":[{"count":1,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/923\/revisions"}],"predecessor-version":[{"id":924,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/923\/revisions\/924"}],"wp:attachment":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/media?parent=923"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/categories?post=923"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/tags?post=923"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}