Tower Private Advisors
- All-time highs for some indexes
- Lousy starts for others
- Elevated fear in Emering Markets, little in U.S. and Developed Europe
- Mixed bag of economics
Capital Markets Recap
With today’s trading, the S&P 500 reached an all-time high, further pushing it into marginally positive territory for the year to date period, as can be seen in the table below. The rest of the year-to-date results are truly a mixed bag, with Australia down by (-)8.32% and Natural Gas up 12.4%.
With few noteworthy stories this week–Ukraine and Crimea will get wrapped into the chart that follows–I decided to take a look at the so-called Fear Indexes for the U.S., Developed Europe, and Emerging Markets, given the unrest–around the globe, it seems. The chart below plots the next-30-days implied volatility–implied, so called, because it is implied from option pricing. When these go up, they suggest that market participants expect increased volatility; i.e. they’re fearful. From this, we can see that fear in emerging markets is up by about 37% from a year ago; it’s down by 8.50% in the U.S.; and fear in and about developed Europe is down by 20%. Notice how, for the most part, the indexes move in sync.
On a longer term chart, only emerging markets seems at all elevated, and that’s probably to be expected what with the unrest in Ukraine, Thailand, etc. While our services suggest it’s too early to get excited about emerging markets, the time is getting closer for considering investments there.
None I could find that were worthy of your attention.
Here is a bit of a troubling developement–or it might not be. What you have here is a chart showing economists estimates for the U.S. economy relative to the actual releases. Technically, it’s called the Citigroup Economic Surprise Index. So, for example, economists produce estimates for Nonfarm Payrolls; the averaging of them is called the consensus estimate. Then, the actual Nonfarm Payrolls report is released and we find out how badly economists have missed the estimate. Very crudely speaking, if the line in the chart is rising, economists are being too pessimistic; if it’s falling, too optimistic. When the line is at the top/bottom, economists are missing by the widest margin. We’re now in a mode of economists being too optimistic, and depending on your view–of your portfolio–that can be good or bad. Heavy in bonds? Good news. Heavy in stocks? Depends on your view of the Federal Reserve. With disappointing economic data, the Fed is more likely to prolong its easy money policy. Companies, though, are obviously going to struggle in a weaker economy.
We were treated to three regional Federal Reserve surveys (Richmond, Dallas, and Kansas City), Chicago Purchasing Managers index, and ISM Milwaukee. The Dallas and Richmond surveys showed sharp declines in economic activity; ISM Milwaukee a more modest decline, while the Kansas City Fed survey showed a better-than-expectations reading, but one which was lower than last month; the Chicago report, however, was better than expected (59.8 v. 56.4) and in line with last month’s reading.
Housing activity picked up a bit this week, however. The Case-Shiller Home Price Index showed an 11.30% year-over-year increase in home prices. There is quite a lag to the Case-Shiller indexes, with this release representing Q4 2013 data, which didn’t include the nasty weather that has been the whipping boy for every poor economic release. Arguably affected by weather, however, is housing activity, and New Home Sales enjoyed an unexpected increase of +9.6%, versus a forecasted decline of (-)3.4%. Pending Homes Sales, however, fell by (-)9.1%, again, astounding economists, who had looked for a (-)6.1% decline. The second coming of Q4 GDP was released this week, and it showed a decline from 3.2% at the end of January to 2.4%, the result of smaller personal consumption than originally figured. What goes on with GDP revisions is that some of the data for each quarter is initially estimated; each revision reflects the fact that more of the data is realizes as opposed to estimated; at the end of next month we’ll get one more revision on the Bloomberg terminal. After that, the data will continue to be revised and revised and revised.
It’s the first week of the new month, and that means payrolls are released on Friday. They’ll come from two sources, the Establishment Survey (of brick-and-mortar establishments) and the Household Survey, from which we get the Unemployment Rate. Economists estimate that the Nonfarm Payrolls report will show 150,000 jobs were added, while they expect the unemployment rate to stay unchanged at 6.6%. They’ll be wrong on all these fronts, but, still, they estimate stuff. On Wednesday, we’ll get what purports to be a sneak peak at Friday’s report in the form of the ADP Employment report. Interestingly, economists estimate that report will show 155,000 jobs were added. It’s really a pretty heavy week of data, but none of it will matter in light of Friday’s report.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors