Winter 2012/2013 Market & Economic PIERspective

Might as Well Face It, You’re Addicted to Love Crises

By: Jim Scheinberg – February 12, 2013


One can’t help but note that there seems to be a theme of the Obama era, seemingly high stakes drama. The months following his reelection have not started any different than those of the prior 48. Once again, we face cracking our sovereign heads on a fast approaching debt ceiling. Again, the expiring tax code of the last decade is being dealt with in a political/economic game of chicken… just like two years ago. And similarly, the solution continues to be cobbled together with stop gaps and half fixes instead of comprehensive solutions. It’s not necessary to assign blame to the President or Congress for being the cause of this cycle of eleventh hour MacGyvering of our national economic policy. For purposes of this commentary, it makes little difference. One thing is for certain however, the media loves it…and they play the cords of the public’s emotions around these crises-du-jour like a master conductor. When they do, market volatility follows suit.

Even the decisive re-election of Barack Obama on November 6th was met with a dramatic Wall Street hissy-fit. During the six trading sessions following the election, the S&P 500 dropped over 5%. Rank speculation of higher taxes and a fully implemented Obamacare had some right-leaning investors in a panic. As with many of the emotional outbursts of the last four years, reality turned out to be much more muted than worst fears had assumed. And so, by the end of the year, the market has rallied back nearly to the place it was before the election (unchanged for the 4th Quarter and up 16% for the year).

4Q12 Equity Markets4Q12 Debt Markets

It was a good year for stocks in general across the globe. Developed and emerging market international equities, not burdened with our dramatics, rallied around 6% during the 4th Quarter, to finish the year with gains in line with those of their U.S. peers. Value stocks across the globe started to outperform in Q4, leading growth names by a touch for the year. This is a potential indication that the cyclical economic recovery we forecasted in Q3 may finally be at hand.

Again in 2012, traditionally perceived risk arenas were the place to be in the debt markets. The 10-Year Treasury finished off a quiet year just an 1/8 of a point away from where it started, closing with a yield near 1¾%. That meant that high quality bonds had to settle for near coupon returns, which were already at historic lows. High Yield enjoyed another meteoric rise, posting gains equal to the equity markets. But it turns out that the best place to be in 2012 was in Emerging Market debt. As the world woke up to this asset class and money flowed in, yield spreads tightened and combined with attractive coupon rates to post percentage returns in the low 20s.

Buildings on a Solid Foundation

So if this crises turns out to be overblown (like most crises seem to be), what should we be paying attention to? Again, I refer back to my main guidance of last quarter. It’s the real estate market stupid. So how is the real estate market doing? So far, so good. The S&P Case Schiller Index continues to show strong gains in the national home market. During the 4th quarter, the August through October data was announced, showing 2%, 3% and then 4.3% improvement in prices nationally. Existing homes sales continue to show strength, with monthly sales eclipsing the five million units a month level for the first time since the recent bear market in residential real estate began. With the continued improvement in sales volume, and the number of homes available on the market still low, inventory now stands as just 6.1 months, with units available down over 20% from a year ago. (Source NAR, 1/22/13)

It’s beginning to look a lot somewhat like Christmas

Last quarter, we theorized that consumer behavior would follow the housing market’s improvement closely. And up until December, all indications were that it was. Both the Conference Board and the Michigan Sentiment Index showed much larger readings than expected in September (released in October) and continued to climb through November. However, as the media and politicians began to fan the emotional flames surrounding the looming “Fiscal Cliff,” the December reading showed a sharp pull back in sentiment.

Screen Shot 2013-02-14 at 11.42.35 AMI have commented before during similar media-hyped crises, like the debt ceiling showdown in August 2011, consumer behavior does not fully follow the short-lived drops in sentiment. In 2011, back-to-school buying didn’t disappoint, as the drops in sentiment would have indicated. This year, Christmas sales also showed that the consumer was alive and well. Retail sales for the season improved 3% year-over-year. Though a healthy advance, 3% was a slight disappointment to more lofty expectations of 4.1% growth. This shocked many observers, since the beginning of the holiday shopping season, which began around Thanksgiving, had shown much stronger improvements. Perhaps all the propaganda around the fiscal cliff did manage to talk some consumers out of their holiday cheer a bit after all.

May I(SM) Be of Service to the Economy?

Consumers may not be the only ones who bought into mania. The Institute of Supply Management, which had shown some firming in their manufacturing sentiment data, could not gain any momentum in Q4 as readings hovered in the slow growth range. The services side of their studies, however, showed stronger growth conditions, which actually accelerated into the end of the year. The non-manufacturing RoB for December came in at 56.1, which is approaching its post-crisis highs.

ISM_PuchasingManagersIndex ISM_NMI-CompositeIndex

Labor Gains

This steady and building confidence from the business sector bodes well for the labor market. Though not fully robust yet, gains in the job market have been steadily whittling away the unemployment rate, which ended the year at 7.8%. The number of employed people rose from 140.9 million in December 2012 to 143.3 million this December, for a gain of 2.4 million. Those who are classified as unemployed fell from 13 million last December to 12.2 million last month, an improvement of over 800,000. Though not close to robust, the improvement in the domestic jobs situation in 2012 is a good base for acceleration in 2013. (source

PIERing Ahead Upward

TouchedByGodAll of this leads right back into one thing: Confidence. If the consumer is growing confident about housing and their jobs, they will continue to increase their participation in the economy. If business and housing continue to improve, then business managers will continue to invest and hire. If sales and hiring improves, then the consumer will grow more and more confident. Get the picture? When was the last time we could use the word confident? It’s been well over five years. Guess what also happens if/when the above scenario starts to play out… Tax receipts climb, easing budget concerns at the Federal, state and local levels. Trade with our overseas partners also increases, leading to further gains in the emerging economies of the world. Improvements like these generally help the economies of our more developed international brothers in Europe and Asia, all of which roles back to improving sales for U.S. multinationals. Can you imagine what it will look like once the economic engine of the globe is firing on all cylinders? Pretty bright PIERspective, isn’t it?

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