Keep Optimistic and Carry On

Global CIO Commentary by Scott Minerd

Investment themes tend to last for long periods and often take longer to play out than many investors expect. Nowhere is that more apparent than in bond markets, where there has been much concern about rising interest rates. While U.S. interest rates should rise over the long-term, it is not a major risk in the near-term and will likely make for a benign investment environment. The strong equity returns and rising rates in 2013 were welcome news for pension funds and helped to erase some of their underfunding. Now, they appear ready to rotate back into debt, which should provide solid support for fixed income and subdue the risk of long-term U.S. interest rates rising significantly in the near-term.

Broadly speaking, the ongoing trend of rising stock prices in the United States points to risk-taking that should translate into further spread tightening in credit. On a relative value basis, two appealing pockets within fixed income are likely to be asset-backed securities and municipal bonds.

U.S. economic data has been strong so far this year – a trend that looks promising and which I expect will continue. The strength in the U.S. economy during the fourth quarter of 2013 could translate into GDP growth of about 3 percent and has given the economy and equities a lot of momentum coming into the first quarter of this year. Heavy discounting during the holiday shopping season was a positive for U.S. GDP growth. After several years of tepid growth, there are now powerful forces driving output in the United States and it appears as though the strength will continue through the year. Indeed, economic growth for the full year could reach 3.5 percent, or even higher.

Now, in the United States, Europe, and Asia, most of the macro risks and headwinds that caused volatility in 2013 are behind us. The political gridlock in Washington will ease with mid-term elections looming in November, and the fiscal drag of sequester has been replaced by a lower deficit and expectations of higher tax revenues. Prospects in Europe have improved as periphery economies have become competitive once again and the prospect of a renewed crisis appears to be past. European equities, especially in Italy and Spain, appear undervalued and should be well placed to outperform. In Asia, Japan is pressing ahead with its expansionary Abenomics policies, while China is taking the necessary steps to reform into a consumer-driven economy.

On balance, it appears we are in the best of all worlds for equity and fixed-income investors for the first three to six months of 2014.

Recovery Ahead for Emerging Market Exports

Over the past year and a half, emerging market (EM) export growth has slowed dramatically, hovering near low single digits. Although some of this slowdown may be structural in nature, due to factors such as lost competitiveness and shifting composition of goods traded, the largest factor is probably lackluster external demand from developed countries. Strengthening activity in the United States, which directly accounts for 15 percent of EM exports and a much larger share of finished goods exports, bodes particularly well for EM countries, which could see exports accelerate significantly during 2014.

ESTIMATED FISCAL DRAG ON REAL GDP GROWTH

Source: Haver, Guggenheim Investments. Data as of 12/31/2013. *Note: Emerging markets include all countries in the IMF grouping.

Economic Data Releases

Weak Payrolls Report Contradicts Positive Data Elsewhere

• Non-farm payrolls were far below expectations in December, at 74,000. Adverse weather and seasonal adjustment factors likely played a role in the disappointing figure.
• Average hourly earnings ticked up 0.1%, while average weekly hours fell from 34.5 to 34.4.
• The unemployment rate dropped to 6.7% in December, mostly due to a 0.2 percentage point decline in the participation rate as extended unemployment benefits expired.
• Retail sales rose 0.2% in December, up for a ninth straight month. Excluding autos and gas sales were strong at 0.6% growth from November.
• The NFIB Small Business Optimism Index continued its rebound in December, rising to 93.9.
• The Empire Manufacturing Index jumped to 12.5 in January, the highest since May 2012.
• Business inventories increased for a sixth consecutive month in November, rising 0.4%.
• Initial jobless claims fell by 15,000 to 330,000 for the week ended January 4th.
• Mortgage applications rose 11.9% for the week ended January 10th, the largest weekly increase since March 2013.
• U.S. producer prices grew 1.2% year-over-year in December after the largest one-month increase in six months.

Industrial Production Rises Across Europe, China Trade Cools

• Euro zone industrial production rebounded strongly in November, increasing 1.8%.
• Economic confidence in the euro zone climbed to 100.0 in December, rising for the eighth consecutive month to the highest level since July 2011.
• Industrial production in Germany rose 1.9% in November after a 1.2% decrease in October.
• French industrial production jumped 1.3% in November, the best month since April.
• Industrial production in Italy rose 0.3% in November and turned positive on a year-over-year basis for the first time since August 2011.
• U.K. industrial production was flat in November after rising the previous two months.
• The December CPI in Britain decreased to 2.0% year-over-year, the lowest in over four years.
• China’s trade surplus shrank in December as export growth slowed to 4.3% from a year earlier.
• China’s CPI fell back to 2.5%, dropping from 3.0% to the lowest level since May.
• Japan’s Economy Watchers Survey climbed to 55.7 in December, the best reading since last May.

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