Spring 2013 Market and Economic PIERspective

April Showers to Bring May Flowers

By: Jim Scheinberg – May 2, 2013

Well, five and a half years after the U.S. stock market last peaked in 2007, the S&P 500 finally made a new high in the  closing days of the First Quarter of 2013. One could feel the mood on the street change as stocks posted one of their best quarters in history and confidence mounted with the strength of the economic recovery growing. However, as with many periods of optimism over the last five years, gray clouds rolled in and put a chill in the air. Since the close of the quarter, a series of mediocre economic reports have stalled the rally and brought a new set of doubts to the sustainability of the recovery. This is likely due to the beginning of sequestration, across the board Federal budget cuts that began in March, due to a lack of a new budget deal in Congress. Whether this pause is more perception based than an economic reality remains to be seen. But for the time being, any economic acceleration appears to be on hold.

How the Markets Fared

In fixed income markets, this past quarter showed mixed results. As the economy strengthened, U.S. Treasuries saw the yield on the 10 Year rise meaningfully from 1.75% at the start of the year to over 2.05% intra-quarter, before retreating back to 1.85% at quarter’s close. This resulted in modest losses in government bonds, including a retreat in TIPS (only their second down quarter since the financial crisis hit in 2008). A healthy 4% rise in the US. Dollar caused net losses in developed-international and emerging market bonds, in  dollar terms. Only high yield bonds enjoyed strong returns during the quarter, as credit spreads continued to tighten.

Only the United States was able to maintain the momentum of Q4’s rally in global equities. In early February, sluggish economic data out  of Europe and decaying commodity prices killed the rally in foreign equities. Emerging Markets were the worst hit, losing all their January gains and finishing the quarter with net losses, again worsened by the rise in the dollar. In domestic large cap stocks, value oriented  sectors outperformed Growth names, led by impressive gains in Healthcare, Finance and Consumer Staples. The contrary was true in small caps, as emerging growth names shined.

ISm It For Real?

The first thing most school nurses do to assess if a student is actually sick, or if they are just faking it, is take their temperature. Well, since  the recovery began in 2009, we at North Pier have used the ISM Report on Business to take the recovery’s temperature. This index has been an accurate barometer thermometer during the minor sniffles of the last four years, that many thought were full blown flus.

As Q1 unfolded, both the manufacturing and services sides of the study showed the business-to-business economy accelerating from moderate to robust growth. However, as the quarter came to a close, March data appeared to be less worthy of enthusiasm. Though current conditions continued to be strong, new orders fell off dramatically. Again, March was the first month of sequestration so this very well could be a wait-and-see pause, and not the true effects of a decline in spending appetite.

Feeling Kinda Sentimental

Consistent with the above referenced business sentiment; consumer confidence readings also took pause in the last month of the quarter. There was a sharp drop in the more volatile “Expectations” component in March, again, as scary news of the pending budget cuts rolled across the headlines. Here we find some clues that this may have been some short-term fear and not the actual effects of work furloughs and cancelled orders. The just released April data shows that the consumer appears to be alive, with the 68.1 reading  rivaling the best levels since the 2008 financial crisis began. Though we have been to these same heights in 2011 and 2012 before, and failed to advance, continued improvements in the labor force and housing may be enough to break through to pre-crisis norms.

Laborious Improvements

So how’s the job hunt going? Here again we saw a pause in an otherwise promising advance in the labor markets. March saw the addition of 88,000 jobs, a disappointment to many and a retreat from a recent pace of 150,00-200,000 new jobs a month. Again, this could well be related to businesses engaged with Federal contracts, waiting to see the effects of sequester. But even in this report, there was a silver lining that was (as it often is) overlooked… revisions to prior month’s data. January and February’s job gains were both revised, adding over 60,000 jobs to prior reports. Therefore, the new result was a gain of around 150,000 jobs reported in this March data release, a far less disappointing number. The coming months will surely tell whether momentum remains in this crucial engine of the recovery, or if jobs are becoming more scarce. We suspect the former.

House it Going?

Our optimism in jobs, business, and the markets in general continues to hinge on this most important sector: real estate. And here, the news is all good. The Case Shiller 20 City Index showed gains of 9.3% year over year. Both existing and new home sales confirm this optimistic data showing robust improvements both seasonally and year over year. This sales activity is impressive considering that housing  inventory has become extremely low, with just under 2 million homes listed for sale. This equates to a 4.7-month supply down from 6.2 months a year ago, and over 12 months supply just a few years ago. In fact, we are now approaching tightness in supply rivaling the levels last seen in 2005. If that trend continues, more price gains are almost assured.

PIERing Ahead (AKA: the North Pier Weather Forecast)

I continue to maintain our primary theme: that it is this mounting recovery in U.S. real estate that is the foundation of the recovery of the global economy. In the near-term, foreign markets may continue to see improvements at a ‘fits and starts’ pace, similar to what we experienced during the last few years. However, it is the steady and continued improvement in the aforementioned key areas of U.S. labor, consumers, and business that support our growing contribution to the global recovery as a whole. As long as real estate remains strong here at home, and we believe it is well evidenced that it should, stumbles and pauses both here and abroad should be short lived. Before long, global momentum should build, thus creating further fuel for our economic advancement here in the U.S. Though spring may have brought in some clouds and light showers, our PIERspective for the months ahead continues to be sunny.