Monthly Archives: April 2014

Macro Focus — Q1 GDP Stalls

Wed, APR 30th, 2014

Huge miss on Q1 GDP, +0.1% quarter over quarter vs. +1.2% expected by economists [GDP growth was +2.3% year over year]. However, it is generally agreed that the brutally harsh weather this winter was largely to blame for the near pause in output. By in large I tend to agree with this notion. My reasoning is simple: the number was so horrible, so awful, so strangely off-trend that nothing else makes sense in my view. When you consider that the underlying economic data still looks pretty strong and that it has been accelerating since March, this is the best conclusion I can draw. The statistic in the report that I believe underprops the true trajectory in the economy – personal consumption – rose +3%, better than the +2% expected. This was the first time since 2005 that consumption grew +3% or more two quarters in a row, though ex-health care purchases the number dips to +1.8%. *Note, under the health care reform law everyone must have health care or pay a fine. The deadline to enroll and purchase insurance was March 31st, 2014. This mandate, in conjunction with Medicaid expansion associated with the law, resulted in the largest rise in health care spend since 1980.*

This +3% consumption number contributed 200 basis points to GDP. To see how each component affected the report please refer to the Reuters chart I have provided below.

Under the report’s hood, the deceleration of the headline number primarily reflects downturns in exports [-7.6%], in nonresidential fixed investment and capex [-2% and -5.5%], and residential investment [-5.8%]. These are areas where adverse weather can dramatically dislocate activity. Other areas of weakness came from a drop in private inventory investment [-$24.3B from the Q4 build] and further decline in government spending [-0.5%]. A draw down in inventory was expected; this number is typically volatile quarter by quarter, particularly from Q4 to Q1.

Aside from adverse weather, I do think that an ongoing general slowdown in housing activity – a direct result of reduced affordability – has negatively impacted GDP for a couple of quarters. Nevertheless, I trust that over the medium- and longer-term housing will track job growth, income gains and the availability of credit. All of these are drifting higher. Over the shorter-term there will certainly be some lumpiness as rates and prices rise [i.e. affordability]. In addition, institutional cash that flowed into the housing market over the past couple of years in search of rental income [yield] has begun to fade.

All told, to borrow a trite expression the lousy headline number should be taken with a grain of salt. Indeed, I expect a solid snap-back in Q2 GDP and a smoother course in the 2H14. The labor economy and household consumption are the two most important criteria I look at in order to judge the trajectory of the broad economy. These two sectors continue to demonstrate resiliency. Other pockets of the economy like industrial, energy & factory production, corporate earnings, credit [including the arc of the yield curve], stable inflation, reduced fiscal drag and accommodative monetary policy augur well for a +2-3% GDP growth path.

Finally, let us not forget that this is the first estimate of Q1 GDP. We will see two more stabs at it between now and July.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200
jware@albionfinancial.com

Q1GDP

Market Surveillance — Bull Market Top Checklist

Wed, APR 16th, 2014

The enclosed table is from the folks over at Strategas Research. It is a Bull Market Top Checklist comparing where we currently stand against both 2000 and 2007. At Albion, we are in a constant state of analyzing every possible market data point we can get in order to assess where we are and where we are likely to go. And given the omnipresent chatter about market tops, bubbles and stretched valuations, I thought this summation insightful.

The list is quite comprehensive, though I would add a tenth line that reads “general excesses in economic activity”, which includes measuring levels in consumer behavior, private debt, “blind capital” flows [i.e. unrestrained speculation], ebullient sentiment and over-allocations to equities across the board [institutions and retail]. For now this box receives an “X.”

I would also place an asterisk [caveats] next to numbers 5 and 6. On rising real rates, some context is warranted. Indeed rates have moved higher, but off from an extreme [generational] low base. In the current environment stocks are unlikely to be threatened until the 10-year Treasury yield reaches north of 5%. In past bull markets there was very little wiggle room here, this clearly is not the case today. Regarding weakening upward earnings revisions, the macro backdrop has been marked by persistent fear and loathing over the trailing five year period. Upward revisions and optimistic outlooks have been scarce traits throughout the course of this bull run as corporate managers and stock analysts alike have had their hearts and minds locked onto unknown unknowns. This, coupled with averse appetites for risk, has created conditions where having an upward bias on anything does not pay. As far as new developments go that warrant attention this does not qualify.

Of course, forecasting market tops is more art than science. As a result this checklist is most useful as a guideline tool in which frame the current market backdrop. Through the lens of both history and the ingredients that typically, and in concert, form market tops I find this perspective noteworthy.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200
jware@albionfinancial.com

CheckList

Market Surveillance — Investing at Market Highs

Fri, APR 4th, 2014

Fear of investing at market peaks is understandable. As Diane Lob and Ding Lui over at Alliance Bernstein observe: In the short-term, there’s always the risk that other investors will decide to take gains, or that economic, geopolitical or company-specific news will result in a market pullback. But for longer-term investors, market level really has no predictive power. Market valuation — not market level — is what historically has mattered to future returns.

The first chart below demonstrates, per Alliance Bernstein research (using data from FactSet and S&P), that the stock market is at or close to (within 5%) of its prior high nearly half of the time. There’s a simple reason for this, the stock market rises over time, along with the economy and corporate earnings. As a result, the market typically has regained its prior peak level fairly quickly after dropping. Then, it resumes its upward march, the analysts conclude. The second chart illustrates that valuation, not the nominal price of the index, is best suited for forecasting future returns.

To reiterate, long-run history tell us the majority of the time stocks are at or near record highs [Display 1]. As a result, if you used market level as a gauge you’d be out of the market more than you’d be in (or at the very least you wouldn’t be adding money to stocks very often, which is bad form in reaching long-run retirement goals). Indeed, valuation is a superior tool in forecasting future returns [Display 2]. And at present I believe that valuations are reasonable – particularly in the context of low rates, inflation and a durable economic recovery (with a still-accommodative Federal Reserve).

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200
jware@albionfinancial.com

NearHighs

Valvs.ML