Market Digest – Week Ending 3/8
The Sequester arrived, but capital markets barely noticed. Friday’s jobs report exceeded expectations, providing further evidence the US economy is in expansion mode. China announced a growth target for the year of 7.5%. While below last year’s pace, the plan includes significant government spending initiatives and was viewed positively by global equity bourses. Stocks rose and Treasuries fell.
S&P 500: 1,551 (+2.3%)
MSCI ACWI ex-US: (+1.9%)
US 10 Year Treasury Yield: 2.06% (+0.09%)
Gold: $1,578 (-0.1%)
USD/EUR: $1.300 (-1.4%)
- Monday – Federal Reserve Vice Chairman Janet Yellen said the central bank should press on with $85 billion in monthly bond buying while tracking possible costs and risks.
- Monday – China set a growth target of 7.5% for the year, including government spending aimed at raising household income and increasing domestic spending. The government also said it would seek to contain a housing bubble by enforcing higher down payments and higher rates for second home purchases.
- Tuesday – Venezuelan President Hugo Chavez died, leaving an uncertain political future for the country.
- Wednesday – The House passed a stopgap measure to avoid government shutdown at the end of the month. The bill will now go to the Senate.
- Thursday – Household net worth increased 1.8% in the fourth quarter to the highest levels since the end of 2007, according to a report issued by the Fed. Borrowing increased 2.4% in the quarter, indicating the deleveraging phase for US consumers may be over.
- Thursday – Spain conducted a successful debt sale, easing concerns about European debt in the wake of Italian elections last week.
- Friday – Employment rose by 236,000 jobs last month, more than expected. The jobless rate dropped to 7.7%.
- Friday – PIMCO’s Bill Gross said the US economy may expand by 3% this year, marking a change from the company’s more pessimistic previous view.
- Friday – North Korea responded to new UN sanctions by symbolically scrapping the 1953 armistice which effectively ended the Korean War, and by canceling a cross-border hotline.
Friday’s strong jobs report makes it difficult for even the most bearish investors to deny the US is in growth mode. PIMCO’s long time pessimist Bill Gross acknowledged the “new normal” may include 3% real growth this year. There is no room for complacency, but barring a shock from outside of our shores we are optimistic economic momentum will continue for the balance of 2013 and most likely well beyond.
With cheap borrowing costs and ample job seekers (in most industries), companies should become increasingly aggressive in expansion efforts. Likewise, consumers have begun shifting back to what they do best – consume. Household debt increased in the fourth quarter for the first time since 2008. Use of leverage became extreme in the mid 2000’s, but modestly expanding debt is healthy for the economy and a good sign.
To keep things in perspective, the positive surprise currently unfolding is nothing more than a return to “old-normal” growth, not gangbusters expansion. “Old-normal” is now generally accepted as the most likely scenario for 2013, and is probably priced into most securities. For stocks, this leaves room for additional upside, as well as downside. But in our opinion the bond market still feels imbalanced, presenting more downside risk than upside potential.