Global CIO Commentary by Scott Minerd
The global economy is at the start of the first global synchronous expansion since 2007. In Europe, the periphery has lived through a depression, but as prices have declined, unit labor costs have fallen, spurring recovery. Overall, Europe is expanding and the outlook is further buoyed by rising expectations that the European Central Bank will likely engage in some form of quantitative easing. Chinese manufacturing data showed strength over the weekend, and while not reflecting vibrant growth, it is reasonable to say that the worst is probably behind Asia’s largest economy for the time being.
In the United States, Black Friday retail sales were somewhat disappointing at first glance. The lower level of sales were likely the result of deeper price discounts, suggesting that the U.S. economy could face deflationary pressure. That concern, coupled with stubbornly high unemployment, indicates that there is only a remote chance that the Federal Reserve will change monetary policy in December and risk upsetting the crucial holiday retail season. Interest rates, therefore, should remain range bound through the end of the year and Fed-driven liquidity will likely continue pushing U.S. stocks higher.
Any eventual change in QE will almost certainly be accompanied by incoming Fed Chairman Janet Yellen changing forward guidance, such as keeping rates at the zero bound until 2016, and possibly reducing the unemployment threshold to 6 percent from 6.5 percent. So, absent an unexpected shock that could disturb financial markets, the current environment should remain favorable for risk assets.
Historically, after a year with such strong U.S. stock returns as we have seen this year, equities have continued to climb on average another 7 percent in the first quarter of the next year. Still, long-term investors should remain wary that this rally is in a late phase, but for now, momentum and monetary accommodation should drive asset prices higher, and some of the sharpest gains often come as the market nears its peak.
Signs of Synchronized Global Expansion
The latest readings of global Purchasing Manager Indices (PMIs) reflect a convergence in manufacturing activities across different regions. Major advanced economies, including the United States, United Kingdom, Japan, and the euro zone, have seen expanding manufacturing activities for five consecutive months through November. Benefiting from the recovery in external demand from advanced economies, manufacturing activity in most emerging countries such as China, India, South Africa, and Turkey has also returned to expansion after a slump over the summer. One exception is that manufacturing activities in some commodity-driven countries continue weakening as major commodity prices remain depressed.
NOVEMBER 2013 GLOBAL MANUFACTURING PMI* OVERVIEW
Source: Markit, Haver Analytics, Guggenheim Investments. Data as of 11/30/2013. *Note: The PMI data for the U.S. is from the ISM manufacturing index, for China is from the official PMI index, and for other countries are from Markit.
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