An Opportunity to Buy

Global CIO Commentary by Scott Minerd

Today, economic fundamentals in the United States are as strong as they have been since 2011. One would expect, therefore, that bond yields would rise and equities would rally. Instead, recent turmoil in emerging market countries has led to lower Treasury yields and a sell-off in U.S. equities.

Now, with the 10-year Treasury yield sitting at about 2.67 percent, there is probably more risk that interest rates will decline further rather than rebound over the short-term. However, the window for bond prices to rise is limited, so selecting credits carefully is key. Over the longer term, improving economic fundamentals in the United States will ultimately drive interest rates higher.

The indicators that I typically follow do not suggest that we have established a major top in the U.S. stock market. The current sell-off feels more like a healthy correction, the first since the last major correction in 2011. I am somewhat surprised by the timing of the latest rout, given the typical seasonal strength in January and February, but the U.S. Federal Reserve is finally letting markets self-correct after years of intervention since the 2008 financial crisis. We will likely look back on this time as an opportunity to buy.

Conventional Correlation between Stock and Bond Markets Returns

Historically, rising equity prices have been associated with falling bond prices (rising bond yields), as stronger economic fundamentals drove investors to stocks and away from bonds, and weaker economic growth produced the reverse. However, over the past few years, equity and bond prices began moving together as both markets were inflated by floods of liquidity from accommodative U.S. monetary policy, which distorted the traditional relationship. After tapering of quantitative easing by the U.S. Federal Reserve was first suggested in mid-2013, markets began returning to more normal correlations, driven not by expectations of continued quantitative easing, but by the economic outlook.

S&P 500 AND 10-YEAR TREASURY YIELD

Source: Bloomberg, Guggenheim Investments. Data as of 1/31/2014.

Economic Data Releases

Mixed Data in United States Continues to Be Distorted by Weather

• Fourth quarter GDP grew 3.2%, with consumer spending rising at the fastest pace in three years.
• The ISM Non-Manufacturing Index increased to 54.0 in January, more-than-forecast, and up from 53.0 in December.
• U.S. ADP private sector employment rose by 175K in January, below analyst’s expectations of 185K.
• Mortgage applications rose 0.4% for the week ended January 31, rebounding from the previous week’s decline of -0.2%.
• The January ISM Manufacturing PMI came in at 51.3, below the previous month’s 56.5.
• Construction spending rose 0.1% in December, down from the prior month’s 0.8% increase.
• The ISM New York Current Business Conditions Index rose to 64.4 in January, up from 63.8 in December.
• U.S. factory orders fell -1.5% in December; after an increase of 1.5% in November.
• The University of Michigan Consumer Confidence Survey confirmed a dip in consumer confidence in January, however, it was not as sharp as analysts had forecast.

Euro Zone Momentum Grows as United Kingdom Continues its Strong Expansion

• The euro zone Consumer Price Index saw a drop in inflation to 0.7% in January, down 0.1% from the previous month.
• The euro zone Composite PMI reached 52.9 in January, its highest level in over two years.
• Euro zone Services PMI came in at 51.6 for January, continuing its steady increase.
• Spain's Services PMI increased to 54.9 in January, indicating a strong start to the year.
• German Services PMI growth eased to 53.1 in January, dropping from 53.6 in December.
• Italian and French Services PMIs both rose in January, increasing to 49.4 and 48.9, respectively, continuing recent improvements.
• The volume of retail sales in the euro zone fell by -1.6% in January, the largest monthly drop in over two years.
• Euro zone PPI increased 0.2% in December compared to the previous month; the figure was down -0.8% on a year-over-year basis.
• The U.K. Manufacturing PMI continued to expand in January, registering 56.7 compared with 57.2 in December 2013.
• Japan’s National Consumer Price Index registered inflation at 1.6% in December, a marginal increase on the previous month.
• Chinese official Manufacturing PMI fell slightly to 50.5 in January, down 0.5 from December.
• China’s Non-Manufacturing PMI registered 53.4 in January, falling from last month’s 54.6.

VIDEOS AND PODCASTS

 

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

Anne Walsh, Chief Investment Officer for Fixed Income at Guggenheim Investments, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.

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2022’s Upside: The Fed Has Put the Income Back in Fixed Income

 

Macro Markets Podcast Episode 26: Mortgage-Backed Securities, Structured Credit, Market Liquidity

Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Fixed Income, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.

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Macro Markets Podcast: Episode #26