It was a busy week on the economic front. We don’t often like to bombard you with this much detail, but many of these particular numbers are important.
The advance report for the 4th Quarter 2011 real Gross Domestic Product came in at an annualized +2.8%. (By ‘advance’ of course, we’re referring to the first of several, increasingly more detailed, less estimated and presumably more accurate releases over the next several months.) This was a bit lower than expected, as the consensus had been hovering around the +3.0% range; but was better than the 3rd Quarter’s +1.8% reading. For the full year, real GDP was up +1.7% after a +3.0% year in 2010. So the economy is slow, but ‘trudging’ along.
Several items contributed. Mainly, growth in final sales was weaker than expected—based on lighter consumer spending, business fixed investment and a substantial (-12.5%) decrease in federal government defense spending (however many defensive-related spending items tend to be more volatile). The much maligned auto sector contributed to 0.3% of growth, or about 11% of the total growth for the quarter. As the President mentioned during the State of the Union, American carmakers are indeed experiencing a recovery.
The slowed momentum in spending is an important component, and whether this continues to moderate or recovers will be a critical component to performance in the 1st Quarter of this year. We would not be surprised to see a bit of pullback in early 2012—to a rate of 2% or somewhere in that range—but preliminary estimates for the second half of 2012 and 2013 look better than that.
As mentioned earlier this week in our special note, the Federal Reserve Open Market Committee decided to leave the fed funds rate unchanged at their 0.00-0.25%. Additionally, their language pointed to continued low rates through at least late 2014. Considering how far out that estimate is, it’s a very curious policy from several levels—it appears to be part public relations, and a continued commitment to sustain a slow-growing economy at the expense of possible inflationary pressures down the road. This was perhaps confirmed by Ben Bernanke’s press conference comments confirming the Fed’s willingness to consider further stimulus action if necessary, especially considering their assessment of possible downside risks in the global economy—related to the situation in Europe. At the same time, however, this may be ‘too much information’ and limit the Fed’s flexibility over time. This could also delay a catalyst for further improvement: consumers or businesses may not feel any urgency to borrow at current low rates (since these will be around for a few years), which could drag out and delay economic growth.
Initial jobless claims were up a bit from last week, to 377,000, although the more closely watched (and less ‘noisy’) four-week moving average dropped to 378,000.
Durable goods orders rose +3.0% for December, which was more than the expected +2.0%. Several components of the underlying report showed decent growth, including ‘core’ capital goods (non-defense, non-aircraft), which reversed some weakness from prior months. Shipments were also up. All-in-all, despite the Fed’s comments yesterday regarding some slowing in business spending, these reports have been showing the economy growing at a moderate, albeit not explosive pace.
Pending home sales fell by -3.5% (month-over-month) in December, which was slightly more than the -1.0% expected number and reversed stronger gains of the prior few months. This index tracks ‘signed sales contracts,’ and usually front-runs the existing home sales number by a few months—so perhaps some weaker numbers on that front are forthcoming. The FHFA home price index, which tracks house transactions using agency-conforming loans, was up +1.0% for December, however. This index has shown some better momentum than a few other home price indexes. Overall, a continued choppy housing market, but the volatility in monthly numbers points to possible bottoming, as opposed to continued free-fall downward.
New home sales numbers were down -2.2% for December, at a 307,000 seasonally-adjusted annualized rate, which was in contrast to consensus expectations for a 2% increase. In fact, 2011 became the worst year on record for new home sales, and the number of homes being built remains extremely low. While negative news continues for sure, the overall number of homes being built is ridiculously low—so low, in fact, that we are barely keeping up with the number of homes being ‘scrapped’ each year, let alone new homes needed to keep pace with demographic demand. In other words, in a few years we may need more.
Lastly, the Michigan Consumer Sentiment Survey increased to 75.0 in January, a point or so higher than consensus. Both current conditions and expectations were higher, which resulted in the best reading since last February.
Market Notes
| Period ending 1/27/2012 |
1 Week (%) |
YTD (%) |
| DJIA |
-0.47 |
3.78 |
| S&P 500 |
0.09 |
4.79 |
| Russell 2000 |
1.83 |
7.87 |
| MSCI-EAFE |
1.63 |
5.96 |
| MSCI-EM |
2.16 |
10.94 |
| BarCap U.S. Aggregate |
0.61 |
0.51 |
| U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
| 12/30/2011 |
0.02 |
0.25 |
0.83 |
1.89 |
2.89 |
| 1/20/2012 |
0.05 |
0.26 |
0.91 |
2.05 |
3.10 |
| 1/27/2012 |
0.06 |
0.22 |
0.75 |
1.93 |
3.07 |
U.S. stocks were up a bit on the week, at a more tempered pace than previous ones so far this month. Utilities and technology led the way, while telecom services and health care lagged the market by the greatest degree. Overall, growth outperformed value and small-caps beat out large caps on the week. Thus far, from an earnings standpoint, 169 companies in the S&P 500 have reported and about 2/3 of these have beaten analyst estimates. More to come this week from several high profile companies.
Additionally, foreign markets (emerging market in particular) have continued their streak of outperformance in 2012. Both U.S. and global REITs also fared well, both up over 2% on the week with decent earnings numbers reported. Commodities also gained over 2%, led by strong weeks in silver and rebounding natural gas. Gold also did well with the Fed’s actions implying a weakening effect on the U.S. dollar. So far this year, industrial metals have been the best performing commodity group with global GDP prospects looking brighter, especially with fewer worries about carryover to emerging markets.
U.S. bonds were up a bit with lower rates across the board—especially in the most liquid 5-10 year area dabbled in most in by the Fed. However, ‘credit’ including high yield debt and foreign bonds (especially emerging markets) were the best performing. Positioning here has been a positive to our portfolios this year.
Bond auctions in Europe have continued to go ‘well,’ meaning that yields demanded by market participants/bond buyers haven’t been prohibitively high. In times of crisis, such as with Italy and Spain in prior months from time to time, investor demand for higher and higher yields on debt is a byproduct of distrust in that particular government’s debt. By accepting more reasonable (lower) yields, investors are signaling higher levels of confidence… a good thing. Signs of strength from Euro leaders have tended to result in better auctions and lower rates.
In particular, Italy has a large amount of debt coming due in February and March, with other countries following in lesser amounts in the spring and summer months—so interest rates on these refinancings will be of particular interest to investors and politicians.
Enjoy the week.
Karl Schroeder, RFC, CSA, CEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611
Sources: FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Standard & Poor’s, U.S. Federal Reserve, Wells Capital Management, Yahoo!. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. 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. Schroeder Financial Services, Inc. is a registered investment advisor.