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Gauging Global Growth in 2014 & 2015

The outlook for global growth is important to investors, since it defines the ultimate pace of activity that creates value for countries, companies, and consumers. This week, as investors begin to digest the S&P 500 earningsreports for the second quarter of 2014, we provide an update on how estimates for economic growth for 2014 and 2015 in the United States and across the globe have evolved over the past few years. Last week, Christine Lagarde, Managing Director of The International Monetary Fund (IMF), signaled that the IMF would cut its global growth forecasts for both 2014 and 2015, when it releases its mid-year forecast update later this month. Although the release garnered plenty of headlines in the media, the majority of financial market participants took little notice of the report. Why? Because consensus…

Gauging Global Growth in 2014 & 2015

 

Disconnect?

In the wake of the release of the monthly jobs report, many financial market participants are debating the seeming disconnect between the weak first quarter of economic growth and the recent run of strong data for April, May,and especially June 2014.  The rapid improvement in the labor market, and in other economic data reported over the past several months, is at odds with the 2.9% decline in gross domestic product (GDP) in the first quarter of 2014. Which is correct? We continue to expect that economic growth may rebound to a 3% pace for all of 2014.* In fact, the return to a more normal weather pattern nationwide has already led to a sharp snapback in economic activity.

Disconnect?

 

 

2014 Mid-Year Outlook

As we expected, markets in 2014 have been less influenced by politics and policymakers than in 2013 and more dependent upon growth. Growth is an essential characteristic of all living things, and in2014, growth is vital to our outlook for the economy and markets. Our notes from the field contain these key observations and reaffirm our forecasts: After an extreme winter weather-induced slowdown in the first quarter, the U.S. economy began to thaw with the warmer temperatures in the spring. We continue to believe U.S. economic growth is on track to accelerate by about 1%….

2014 Mid-Year Outlook

 

Behind the Curve?

The term “behind the curve” has been used to describe a Federal Reserve (Fed) that is perceived to be late in lowering or raising interest rates in response to changing market or economic conditions. The most common use of the phrase is to describe the Fed as behind the curve on inflation. The Fed showed little concern over inflation during last week’s Fed meeting, despite the monthly consumer price index (CPI) report showing a continued rise in price pressures for May 2014 with recent gains accelerating Fed Chair Janet Yellen downplayed the recent rise in inflation as likely “noise,”but the response still left investors questioning whether the Fed is behind the curve. Intermediate- to longer-term bond prices, which are most sensitive to inflation pressures, finished last week (June 16 – 20, 2014) slightly lower, and market expectations of future inflation, as measured by Treasury inflationprotectedsecurities (TIPS), moved higher. The implied breakeven inflation rate on 10-year TIPS rose to near a one-year high….

Behind the Curve?

 

Who Are the Buyers and Sellers?

We devote this commentary each week to assessing the many reasons markets may rise or fall. But at the heart of it, all markets come down to just one thing: buyers and sellers. Taking a look at who is buying andwho is selling can tell us something about the durability of the market’s performance and what may lie ahead. Currently, there are six notable trends in buying and selling in the stock market. U.S. stocks are being purchased by corporations and individuals; however, foreigners, hedge funds, institutions, and insiders are net sellers. Companies themselves have been the biggest buyers of stocks. After reducing purchases during the financial crisis in 2008 and 2009 as companies focused on hoarding their capital, corporations have returned to record levels of net share repurchases….

Who Are the Buyers and Sellers?

Better Gauges of Global Growth Ahead

A large number of key economic reports, central bank meetings, and geopolitical events this week (June 2 – 6) should allow market participants to better gauge global growth as we approach the halfway point of the year. The week includes seven major central bank meetings, with the June 5 European Central Bank (ECB) policy announcement getting most of the attention. The data due out earlier in the week on manufacturing, inflation, unemployment, and consumer spending in the Eurozone for April and May will help to inform the ECB’s decision. On the geopolitical front, Ukraine will be in focus when the North Atlantic Treaty Organization (NATO) meets on Tuesday, and the leaders of the G-7 (the G-8 minus Russia) convene on Wednesday. On Friday, June 6, world leaders will gather to mark the 70th anniversary of the D-Day landing in Normandy. Finally, there are municipal elections in South Korea, and Egypt will announce the results of the presidential election it held last week.

Better Gauges of Global Growth Ahead

Oil, Oil Everywhere

For the third year in a row, the summer driving season kicked off with national gasoline prices at $3.67 per gallon, according to data from the U.S. Department of Energy. Prices at the pump are below the $3.80 – $4.00 danger zone where they contributed to economic soft spots in 2011 and 2012. But they may head higher with crude oil prices rising over $104 lastweek — well above the levels seen around Memorial Day weekend duringthe past couple of years. While the conflict in Ukraine may be fueling some f the price gain, this is nothing new — a year ago the world was focused on the conflict in Egypt, and in 2011, the civil war in Libya was the sourceof geopolitical risk to oil prices. So why — if the United States is producing more oil and consuming less than it was a decade ago — is the price of oil going up, and what does it mean for investors?

Oil, Oil Everywhere

Japan Going Godzilla

Godzilla, the latest version of Japan’s King of Monsters, took the top spot at the box office this past weekend. But Japan’s stock market looks like a giant mutated lizard stomped all over it. One of the worst-performing stock markets in the world this year, Japan’s Nikkei Stock Average is down 13% in yen and 10% measured in dollars. The drop has been enough to push down the forward price-to-earnings ratio for companies in the MSCI Japan index to a rare discount to the U.S. S&P 500 Index. Yet Japan’s economy is finally growing. First quarter 2014 economic growthin Japan was a strong 5.9% above the prior quarter and 3.0% above the year-ago quarter, according to data released last week. It marked the fifth straight quarter of growth — a streak not exceeded since before the 2008 – 09 global recession. The quarter’s growth was boosted by spending ahead of a consumption tax increase, which could be largely reversed in the second quarter. Nevertheless, the consensus of economists tracked by *Quantitative Easing (QE) dates **Monetary Base = all money in circulation plus bank reserves held at the central bank Indices: MSCI Japan. One cannot invest directly in an index. Past performance is no guarantee of future results. The Consumer Price Index (CPI) is a measure of the average change over time in theprices paid by urban consumers for a market basket of consumer goods and services….

Godzilla-Sized Stimulus

 

Dollar on the Verge?

As has been the case since late 2008 when the Federal Reserve (Fed) began its quantitative easing (QE) program, there has been a great deal of concern lately among some market participants that the dollar is on the verge of collapse, but is that a likely scenario? 455 of the 500 corporations in the S&P 500 Index have reported results forthe first quarter of 2014 and, in many cases, have also provided guidance on their operations in the current quarter and for the remainder of the year. As always, when discussing the business environment, corporate management cited swings in the value of the dollar versus the currencies of the nations in which they do business, but none sounded the alarm about an imminentcollapse in the dollar. Indeed, many were more concerned about the value of the dollar rising. Why? Because a rising dollar makes U.S. goods and services more expensive to foreign buyers.

Dollar on the Verge?

Global Earnings Picture Reveals

At the beginning of the year, many investors believed analysts’ forecasts for a faster pace of earnings growth combined with lower valuations would lead to stocks in Europe and Japan outperforming U.S. stocks. Now those earnings forecasts are being cut sharply, raising the questions of how much of a value international developed market stocks are and whether they can outperform the U.S. market in 2014.Four times a year investors focus on the most fundamental driver of investment performance: earnings. For U.S. stocks, the earnings reporting season has produced nearly all the gains in the stock market over the pastfour years with nothing but volatility, on average, during the other weeks of the quarter. The earnings season in the United States is now nearly overwith 374 of the S&P 500 companies — representing 80% of the market value of the index — having reported. While the earnings season will only reach the halfway point this week in Europe and Japan, the difference so far between their earnings results and guidance and U.S. markets is striking. High hopes of an overseas earnings rebound are being disappointed, which may be creating a performance headwind.

Global Earnings Picture Reveals