The Independent Market Observer

8/13/13 – More Good Economic News and Thoughts About Developed Markets

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Aug 13, 2013 11:05:03 AM

and tagged Market Updates

Leave a comment

Several pieces of good economic news have come in that are worth highlighting. The most important is U.S. retail sales, which is up 0.2 percent. That might not seem like anything to cheer about, but this is a case where it’s important to look at the underlying figures rather than just the headline.

The overall figure was dragged down by drops in auto sales and building material sales. While not positive, both of those figures are still at very high levels, and, even with the slight decline, growth rates remain at levels consistent with faster growth overall. Gasoline sales increased, which was a positive factor, but this is counterintuitive, as it depends to some degree on higher gas prices, which are actually harmful to the economy as a whole. These three series are also volatile, to the extent that there is a separate statistical series that excludes them in order to provide a better indicator of underlying consumer demand.

Retail sales ex-autos, building materials, and gasoline increased 0.5 percent month-on-month—a strong result that suggests stronger future growth. The bond market reacted, with interest rates ticking back up close to the highest levels of July, indicating that the growth signal, at least as interpreted by the fixed income markets, is real.

The uptick in interest rates, paradoxically, is also a good sign, as it suggests that the bond markets are normalizing. Faster growth should result in higher rates, given a normal market. The more the markets move back to normal conditions, the more we can trust the price signals—and the less vulnerable they may be to future disruption when the Fed actually does start the taper. As far as the taper goes, I remain concerned about the political risks, but there’s no doubt that, thanks to positive economic results, a September start may be in the cards. Watching the interest rate markets normalize supports an earlier taper and suggests the results may not be as bad as feared.

Another piece of good news is the continuing improvement in the housing market. No, I’m not talking about increasing prices but rather the decrease in mortgage delinquencies, which are now at the lowest level in five years, since the third quarter of 2008. Foreclosures are also at the lowest level since the fourth quarter of 2008, and foreclosure starts at the lowest level in six years.

This news holds several positive signals. First, a decrease in delinquencies and foreclosures says that the supply of homes for sale will not balloon, which should support continued price increases. Second, it suggests that financial stress in households continues to decline. Third, it indirectly suggests that rising wealth levels make it worthwhile to own, which should gradually bring renters back to homeownership.

The fact that core consumer spending continues to increase strongly suggests that my earlier case for stronger growth going forward remains on track. The declining mortgage stress indicators suggest that households are becoming increasingly financially healthy. Other pieces of good news include small business optimism, as surveyed by the National Federation of Independent Business, which ticked up again. You could argue—and they do—that this isn’t a very good result historically, but it is moving in the right direction, with plans to expand and increase employment both positive. And, as I’ve pointed out before, to be positive given the headwinds of the past quarters is an achievement.

As I read through this, I worry that I’m becoming a cheerleader, and potentially ignoring bad news, but I don’t think so. While I acknowledge that growth is weaker than in past recoveries, I also recognize the headwinds—and the underlying strength that allows continuing growth in spite of them.

Europe is another example of how, despite challenges, slow progress continues. Greece, for instance, has recorded a primary budget surplus, suggesting the government is getting a handle on its budget issues, even as the decline in its economy has slowed. Europe as a whole is showing signs of improvement, both in fundamentals and in sentiment. The crisis isn’t over, but the decline appears to have stopped.

As far as future growth goes, the fact that the U.S. is expanding and Europe has more or less started to stabilize says that the developed countries will be adding more and more to world growth—or at least, in Europe’s case, not subtracting as much. The decline in China’s growth rates and the headwinds for emerging markets, which I discussed yesterday, suggest they will contribute proportionately less, even as they continue to grow.

All told, it seems that the reassertion of the developed world is quite possible, both on a relative and an absolute basis. If U.S. consumers continue to buy, and Europe can return to growth, that will help the emerging economies even more. Increasingly, it looks like that might be the case.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®