Federated Investors

Federated Investor's Senior Equity Strategist, Linda Duessel, offers a Weekly Update. Below your find an excerpt from the week of April 22, 2016. If you're interested in reading the full report, download it here.

While valuation remains an obstacle, the NYSE advance/decline line has been making a series of new record highs, which is bullish, and many historical and breadth indicators are positive. Dudack Research also notes that, looking at 7 long economic cycles from April 1960 to March 2001, there tends to be an earnings decline or flattening in growth roughly 7 years following a major earnings peak. The average slump lasted 18 months, which equates to 101 months past the original peak. When overlaying the current earnings cycle vs. history, 2015's earnings recession had remarkably similar timing to the average earnings cycle slump. If this parallel were to continue, history suggests there should be a pickup in S&P earnings growth directly ahead in 2016-2017. Then again, we’re just a few weeks away from entering the historically unimpressive summer seasonal period, and seasonality tends to peak in June during election years. This summer could see added volatility with July’s Republican convention, where despite Trump’s strong performance in New York this week, it’s uncertain if he’ll arrive in Cleveland with enough delegates to prevent a brokered convention. Washington Analysis says Trump needs to win big in California to make the delegate math work. And California’s June 7 primary is one of the last of the season. Strap yourselves in! I very much enjoyed meeting with the advisers. My favorite question: “In your travels, does anyone ever disagree with you?” Hmm. Can’t remember when…

Positives

This makes it hard to envision recession anytime This makes it hard to envision recession anytime soon Initial jobless claims unexpectedly fell to 247K in the week ending April 16—the survey week for the Labor Department’s April employment report. No special factors were cited for the drop-off. The decline put initial claims at their and relative to employment, to lowest level since 1973, a record low. Continuing claims dipped to their lowest since 2000. Both send a powerful message of U.S. labor market strength.

More good than bad in housing numbers Existing sales rebounded in March, nearly reversing February’s decline and lifting the 12-month average to its highest level since October 2007. Single-family sales led the increase, and the median price rose, as also was the case in the FHFA gauge. Starts and permits fell, though the data tends to be choppy and subject to seasonal quirks. On a 12-month basis, starts were still up 14.2% and permits were up 4.6%. Builder sentiment was unchanged at 58, subdued relative to last October’s cycle high of 65 but consistent with a slow but steady pace of recovery in the single-family housing sector. The 6-month outlook for both sales and buyer traffic ticked up. All in all, the reports were reflective of positive momentum in housing.

Consumers have a lot of powder Over the past 7 years, consumer net worth has increased 60%, or $34 trillion—twice the size of the U.S. economy. A lot of this has to do with the risk markets, but rising house prices are playing a role, too. The median price reached $230K in March, Evercore ISI says, exceeding its 2005 peak of $229.9K. This is good for consumer confidence, lifts consumer net worth and pushes fence-sitters to move into the market.

Negatives

Not so fast calling the ‘All Clear’ for manufacturing After jumping in March, the Philly Fed index unexpectedly reversed in April, contracting again as new orders fell sharply and shipments declined to their weakest reading since late 2012. The labor market side of the survey was weak as well, with the average workweek and employment components significantly contracting. The decline contrasts with last week’s improvement in the Empire survey and is notable as the Philly gauge tends to act as a bellwether for national trends, where the latest ISM index had suggested improvement. Markit’s flash reading on April manufacturing this morning also softened to its lowest level since September 2009.

Leading indicators disappoint They rose by half the expected increase in March, hurt by the decline in housing permits, softness in manufacturing and less accommodative financial conditions. Still, the index is up 2.2% y/y, indicating slow but positive economic growth.

China Watch Last week we were encouraged by signs of stabilization in China; this week we’re reminded a worrisome credit bubble may be underpinning the improvement. China’s social financing rose $1 trillion in Q1, the fastest 3-month increase in a series dating to 2002. Bank loans drove the surge and total over $15 trillion, tripling in yuan terms since January 2009. The ratio of bank loans to industrial production has jumped to 160 from 100, where it hovered from 2000-2008. China seems to be getting less and less bang per yuan, i.e., it’s taking more and more credit to keep it growing at a slower and slower pace. As Larry Summers pointed out in January, “China put in place more cement and concrete between 2011 and 2013 than the United States did in the whole of the 20th century”—a level of construction suggesting the goal was boosting current activity, not making sound investments. Its mounting excess capacity in a slowing global economy is raising the risks of protectionism, a major issue the U.S. presidential campaign, and of painful consequences when credit slows.

To learn more about Federated Investors and other Money Managers, give us a call at 1-800-541-7774 or contact us here to speak with one of WrapManager's Wealth Managers.

Download Federated Investor's full commentary here

Request free research reports from Federated Investors

Federated Investors - Horror is a Relative Term

Subscribe to Updates

Most Recently Published

Blog Authors