Last week U.S. equity markets posted modest gains with the Dow Jones up 0.7% and the S&P 500 up 1.7%. U.S. economic data was mixed. Positive – continued improvement in new and existing home sales and a 1.8% jump in FHFA home price index. Negative – April durable orders exhibited weakness pointing to softness in manufacturing.
This week we’ll see more housing data with the S&P/Case-Shiller 20-city home price index and pending home sales. Later we’ll get an update on the U.S. employment situation. Current consensus is for a nonfarm payroll increase of 150,000 jobs and the unemployment rate staying at 8.1%.
What is the U.S. “Fiscal Cliff?” In the first half of 2013 there are several tax policies set to expire such as the Bush-era tax cuts, payroll tax holiday, extended unemployment benefits, and the automatic spending and budget cuts mandated by Congress if lawmakers fail to reach deficit reduction goals.
Below is a chart from Goldman Sachs demonstrating the effects of fiscal policy on GDP Growth and 3 outcomes for 2013: 1. Extend all tax policies 2. Compromise 3. Fiscal Cliff which could result in a 4% reduction in gross domestic product.
We believe a compromise will be achieved.
“Politics is the art of postponing decisions until they are no longer relevant.”
- Henri Queuille
The overall stock market continued its retreat last week, with the S&P falling by 4.3% while the Nasdaq was down by 7.2%. Both domestic and international concerns weighed on our equity markets.
Internationally, Greece returned to center stage, with bank depositors fleeing and debt yields spiking. It is becoming clear that they do not have the discipline to remain in the Eurozone. The only question is whether their exit is orderly or otherwise. The drachma, which was retired in 2002 [at a rate of 340.75 drachma to the euro], will be reintroduced in the not-to-distant future. Let’s hope that it is done in a way that does not disturb the other European dominos.
Domestically, both earnings and economic reports were mixed. Housing is bottoming and manufacturing is strong, with industrial production increasing by 1.1%, twice what had been expected. Initial jobless claims are still high [370,000 in the latest week] while the leading indicators index actually fell 0.1% [+0.2% expected]. The dollar strengthened last week, mostly against the euro, as the flight to safety trade dominated.
The Facebook IPO dominated domestic financial headlines late last week, but aggressive sizing [$16B raised instead of ~$10B] and pricing [$38/share instead of ~$32] produced disappointing aftermarket price action. In addition, the Nasdaq experienced technical/communication difficulties during early trading last Friday. As a result, the underwriting syndicate was tested by repeated bounces off of the $38 offering price Friday afternoon [and subsequent breaking of the syndicate the following Monday [with a $34.03 close!]. Perhaps now we can turn our attention back to seasoned issues.
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency”
- Lord John Maynard Keynes [1883 – 1946]
We came across a recent piece which first discussed the importance of exports from individual states to China and then followed that up with projections of what exports from the major countries will be by 2050. As for individual states, our exports to China from Massachusetts have reached $2.1 billion in 2011. From 2000 to 2011 their exports to China have grown 316%! Another example is Alabama which has grown 1342% in that time. Pennsylvania’s exports to China have Grown 1177% to $3.5 billion with chemicals being the largest contributor. As you might have guessed, California is the largest exporter at $14 billion.
The other aspect of world trade changes is the shifting of much of the activity to the east. Projections were made to 2050. By then India will have moved up from below the radar to second in the world at 9%. China will have moved into the number one spot at 17.4% while we will slip from first to third in the world. Interesting entries into the top ten exporters by then will include Singapore, Hong Kong, Indonesia and Korea.
Two lessons emerge-competitiveness among our states on economic policies has important effects. Second, smaller nations in the Far East will have growing importance to us and trade relations with them must be cultivated. And of course trade relations with China will remain critical.
“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
- Charles Darwin
For the second month in a row the U.S. jobs report was disappointing. In April only 115,000 new jobs were created versus expectations for 170,000 new jobs. The unemployment rate dropped slightly to 8.1% from 8.2%, but this was more a function of people dropping out of the labor force as 342,000 people left. Further evidence that the U.S. economy is slowing.
In addition, election results over the weekend in France and Greece indicate that electorates are unhappy with continuing austerity measures, which calls into question the seriousness of Europe’s efforts to address the debt crisis. Many of the nations in the Eurozone are now in recession.
As a result U.S. stocks fell last week with the S&P 500 dropping 2.4% for the week. The biggest weekly decline since December. On the positive side however, oil prices fell 6% which will be a boon to consumers and interest rates declined with the 10 year Treasury ending the week with a yield of 1.88% (chart below, courtesy of stockcharts.com, shows the change in yield for the past 6 months).
“Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.”