/perspectives/global-cio-outlook/escape-velocity-in-the-economy

Escape Velocity in the Economy

The broad improvement in U.S. economic data indicates that the economy is likely to continue to expand, supporting earnings growth and pointing to an eventual return of leveraged buy outs.

January 23, 2013    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

The U.S. economy is reaching "escape velocity," powered by the monetary rocket fuel from central banks around the world. Almost every domestic economic indicator is now positive and the economic backdrop is stronger than it has been in the last seven years. We are in the healthiest financial condition since 2003. If the post-2003 experience were to be repeated, we could see an uninterrupted economic expansion for four years. Although pockets of uncertainty remain, such a favorable outlook for the economy and markets cannot to be ruled out.

Investors can expect a continuation of the themes that have dominated the environment since the recovery began: tighter credit spreads, low interest rates, improving employment, modest inflation, and sustained economic growth. Historically low interest rates and continued earnings growth will support higher equity valuations. As leveraged buy-outs come back into play, undervalued companies with large cash balances are sure to be targets. More merger and acquisition activity would lift share prices higher, furthering the expansionary trend that is already underway.

Rising Yields’ Positive Effect for Equities

Empirical studies suggest that an increase in the Treasury yields does not necessarily lead to weaker equity performance. When yields on the 10-year note remain below 4%, the correlation between S&P 500 monthly returns and changes in 10-year yields are positive, which implies that when yields rise, equity prices move higher as well. An increase in interest rates from a low level is likely to be the result of more robust economic activity, which is positive for equity performance. When the 10-year Treasury yield climbs above 6%, the correlation inverts, with increasing yields leading to decreasing equity prices. This occurs because of the affiliated rise in the inflation premium, which is negative for input prices and earnings, putting downward pressure on equity prices. Given that the 10-year Treasury yield is currently around 1.83%, for now, any potential rise in yields should result in an increase in equity prices.

U.S. TREASURY YIELDS VS. THE ROLLING CORRELATION BETWEEN S&P 500 RETURNS AND CHANGES IN 10-YEAR YIELDS (1962 – PRESENT)

Foreign Markets May Offer More Growth Potential

Source: Bloomberg, Guggenheim Investments. Data as of 12/31/2012.


Economic Data Releases

Further Evidence of a U.S. Housing Recovery

  • The NAHB index of homebuilder confidence stayed at a six-year high of 47 in January, with housing starts in December rising to their highest level since June 2008.
  • The FHFA house prices grew 0.6% month-over-month in November, the second consecutive month of increase. Although existing home sales fell slightly to an annual rate of 4.94 million in December, this is still the second highest level since November 2009.
  • Initial jobless claims for the week of January 12th fell to 335,000, the lowest level in five years. Industrial production rose 0.3% in December, aided by a robust gain of 0.8% month-over-month in manufacturing.
  • Regional manufacturing indices disappointed in January, as both the Philadelphia Fed’s economic index and the Richmond Fed manufacturing index turned negative from their positive readings in December.
  • The University of Michigan consumer sentiment index fell to 71.3 in January, the lowest since December 2011.
  • The Consumer Price Index remained unchanged from November to December, with a year-over-year reading of 1.7%.

European Sentiment Improves, China Accelerates

  • According to the flash estimate, eurozone consumer confidence improved for a second month in January to -23.9.
  • The ZEW survey of expected economic growth in Germany jumped to 31.5 in January, the highest since May 2010.
  • U.K. retail sales (excluding fuel) declined 0.3% in December versus an expected 0.1% gain, while jobless claims fell by 12,100 in December to a one and half year low of 1.56 million. In Italy, industrial orders fell 0.5% month-over-month in November after gaining in October, and industrial sales slipped 0.2%.
  • The eurozone’s year-over-year inflation remained unchanged at 2.2% in December.
  • In China, fourth quarter real GDP rose 7.9% from 7.4% in the third quarter, the first year-over-year acceleration in two years.
  • China’s industrial production and retail sales also continued to accelerate in December, growing at 10.3% and 15.2%, respectively.

FEATURED PERSPECTIVES

September 15, 2023

Third Quarter 2023 Quarterly Macro Themes

Research spotlight on what’s next.

August 22, 2023

Corporate Credit Quarterly Insights - August 2023

Market and portfolio update from our Corporate Credit team

August 21, 2023

Third Quarter 2023 Fixed-Income Sector Views

Technical tailwinds support the market.


VIDEOS AND PODCASTS

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

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.

Macro Markets Podcast 

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.







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.