Market Digest – Week Ending 4/19
It was a dramatic week for the country and the capital markets. The appalling bombing at the Boston marathon was a stark reminder that stability is fickle. On the same day, gold prices dropped nearly 10% and the S&P 500 lost more than 2%, primarily driven by slower than expected growth in China. The remainder of the week was calmer, but the luxury of constantly rising asset prices enjoyed during the last five months may be over. Gold finished the week down about 6%. Treasuries rose modestly as investors sought safer ground and inflation numbers came in below expectations.
S&P 500: 1,555 (-2.1%)
MSCI ACWI ex-US: (-1.8%)
US 10 Year Treasury Yield: 1.70% (-0.02%)
Gold: $1,402 (-5.7%)
USD/EUR: $1.306 (-0.5%)
- Monday – China’s Q1 GDP came in at 7.7%, below expectations.
- Monday – Two bombs were detonated at the Boston Marathon, killing three and injuring over 140 people.
- Tuesday – New home starts in March leapt to the highest level since 2008, driven primarily by multi-family units.
- Tuesday – The March CPI inflation index came in 1.5% higher than last year, below expectations.
- Thursday – China’s central bank said it plans to increase the trading band for the Yuan.
- Thursday – The US expanded investigations into alleged use of chemical weapons by Syria against rebels. If confirmed, it could raise the odds of increased US involvement.
- Friday – Law enforcement conducts a massive manhunt for the second suspect of the marathon bombing. One suspect was killed in an earlier gunfight which also left an MIT officer dead and another MBTA officer in serious condition.
One quarter of modestly slower GDP in China is nothing to panic about (unless you are a gold speculator), but is noteworthy. A hard landing in China would make it difficult for a struggling Europe and an unsteady US to return to normal growth rates. It could even lead to a dangerous scenario almost no one is thinking about – deflation in the US.
Like most, we are more concerned about inflation than deflation in our economy, but we can’t ignore the facts. Low inflation has been incredibly persistent. This has been a positive so far, but it is feasible that a hard landing in China could depress commodity prices enough to cause actual deflation here.
The real fear over deflation is that our mortgage crisis set us on the same path as Japan after their property bubble popped in 1989. In the aftermath, Japan assumed massive government debt, pursued aggressive accommodative monetary policy, and had low interest rates. Even so, it has battled with deflation for years. Happily, there are some big differences. Real estate prices in the US are rising and our equity markets have already passed pre-bubble highs, something that can’t be said for Japan even 23 years later.
We are probably getting a bit ahead of ourselves here. On balance, in our opinion, the US economy remains positioned for moderate growth, moderate inflation and rising asset prices. But the deflation scenario is an interesting consideration in a time where just about everyone expects bonds to lose value and serves as a reminder why owning some bonds may make sense even for skeptics.