Market Recap: Positive Economic News
Positive economic news drove stocks and commodities higher yesterday. Better than expected unemployment claims (lower fillings) and stronger manufacturing data drove the S&P 500 over 1,400 for the first time since 2008, and the Dow Jones Industrial Average to its highest point since 2007. Bank stocks led the markets higher after several banks followed J.P. Morgan’s lead and announced boosts to their annual dividends and authorized share repurchases after clearing Fed stress tests. Industrials also advanced on gains in rail transports. CSX Corp rose by 8 ½ % after it provided a positive outlook around earnings, projecting record first-quarter results despite a marked decline in coal shipments. In our view this is quite significant (not just because it is a sizeable holding inside the GMG Defensive Beta Fund) as it provides further evidence of strengthening economic activity.
Oil fluctuated greatly, first selling off sharply, then rebounding after Reuters erroneously reported that President Obama met with UK PM David Cameron and agreed to the release of strategic Oil reserves. (They did meet and discuss the matter, but did not agree to release any reserves).
Economic data continues to strengthen around the globe, with the most pronounced upside surprises in the United States. We note that the current pace of growth is a continuation of the moderate pace of growth over the second half of last year, which averaged about 2.4% per quarter. Although real GDP growth has still only been modest, labor market conditions continue to improve, which provides reason for additional optimism.
In reaction to the better than expected economic news, Treasuries have sold off significantly since the beginning of the year, with yields rising from below 2% to above 2.3%. In our view, this is unlikely to be the beginning of a bursting of the “bond bubble” as so many predict. First we point out that the “bubble” is really only in treasuries, and as a direct result of Fed policy intervention. Although some as speculating that the Fed may raise rates before their stated target of mid-2014, there is little chance of any changes in policy this year. As such, we believe that the current sell off is likely to be an adjustment of the trading range and not a ‘bursting’. As a way to reduce portfolio volatility, we still like short-term low duration bonds. Additionally, even though High Yield bonds have rallied significantly since we invested in them last December, we believe there is more room for appreciation.
On the commodity front, there are conflicting near-term fundamentals. On one hand, there is softening demand from China, increased supplies in agricultural commodities as a result of a mild winter, and a lesser probability of QE 3 from the US Fed. On the other hand, U.S. economic data continues to improve, and there are signs that the worst may be over for Europe, which is likely to be a great benefit to emerging market economies. Overall, we believe the good news will and is outweighing the bad news. We point to global consumption-weighted indicators that are showing a pick-up in demand for goods across the board.