U.S.: Firing on all cylinders but how much gas?
• The economic engine is humming: multiple economic releases continue to beat expectations; leading indicators remain at supportive levels – last week's ISM Non-Mfg index was the highest since February 2011; and employment figures continue to improve. There are limited new economic reports this week.
• Firing up the final cylinder – employment. January's employment report showed surprising strength (+243k jobs, unemployment at 8.3%) and jobless claims have remained well below 400,000 for several weeks. Employment growth is the final and key ingredient for self-reinforcing economic growth.
• How much gas is in the tank? The savings rate has declined to ~4% again and there are threats of increased taxes and a government spending sequester on the horizon. How long this growth can be sustained may soon again be in the hands of politicians, but for now, sit back and enjoy the ride.
Europe: Enough progress?
• Long, slow road: Europeans leaders continue to say the right things, but progress is slow to follow words. Last week, 25 of 27 EU nations agreed to stricter budget rules and endorsed a permanent rescue fund.
• Greece still unresolved: Negotiations surrounding the Greek debt negotiation remain intense.
• ECB balance sheet has expanded by over €500 billion in the past 6 months through its LTRO (Long-Term Repurchase Operations) which provides 3-year, 1% loans to banks. Quantitative easing at work?
• Bond auctions no longer have investors running for the hills, but should still be watched closely as indicators of how much credence markets are giving European nations' long-term economic health.
• PMI data seems to be hooking up or stabilizing; a good sign for growth and budget expectations.
Earnings Season: Not all is perfect
• Only 56% of the S&P 500 have beat expectations, while 32% have reported earnings below expectations. Two hundred and ninety-four companies (59%) have reported.
• 51% of companies have beat on revenue, with 49% below expectations.
• Russell 2000 earnings are also weak compared to recent history, with 52%positive surprises and 31% negative.
Investment Themes
• Move to the middle: Investors should focus portfolios in the middle of the investment risk spectrum, where the most attractive risk-reward opportunities lie.
1. Seek protection in equities: high quality and/or dividend growth
2. Substitute some equity risk with credit risk: high yield, long-term municipal credit, and global bonds
3. Underweight low-yielding safety: cash and Treasuries
4. Utilize alternative risk control: secured options and absolute return strategies
• Position to benefit from the growth of the emerging market consumer
1. Direct emerging market investments
2. Multinationals selling into emerging markets
• Protect against future inflation and developed currency devaluation pressures:
1. Global fixed income
2. Broad/active commodity basket
Jason Pride is the director of investment strategy at Glenmede and oversees more than $20 billion in assets.
