The Economy and Bond Market Cheat Sheet (September 19, 2011)
Bond yields rose this week as crisis was averted in Europe. The French, Germans and Greeks were able to agree that a Greek euro exit was unthinkable. This calmed the market, which was bracing for a potential Greek default.
While the U.S. is not immune from what is going on in Europe, America appears much further along in dealing with the fundamental issues afflicting Europe today. One hopeful sign is the Conference Board Index of Leading Economic Indicators, commonly known as the LEI. As can be seen in the chart below, on a year-over-year basis, the LEI remains high, indicating reasonably strong economic growth in the next six months.
The LEI has historically been a good predictor of economic growth. The index deteriorated in 2000, well ahead of the recession that began in 2001. In 2007 and early 2008, the index declined before the global financial crisis and associated recession began.
One other factor confirming the strength in LEI is the number of companies in the S&P Composite 1500 Index with year-over-year revenues of more than 10 percent. Currently there are 705, almost half of the S&P 1500, which is very impressive in a slow growth environment. At the bottom of the cycle in late 2009, only 179 companies were growing this fast.
The U.S. economy continues to produce dynamic growth companies which are the driving force behind economic growth and job creation. While the current environment has been difficult, the future economic situation appears to be better than most people will give it credit for.
Strengths
- Industrial production rose a better-than-expected 0.2 percent in August.
- Sentiment among Japanese manufacturers bounced back from depressed levels earlier in the year.
- The University of Michigan Confidence Index rose in September, bouncing off very low levels in August.
Weaknesses
- Initial jobless claims rose to 428,000 in the week ended September 10, indicating no relief on the job front.
- Retail sales for August were disappointing remaining unchanged from July as consumers remain cautious.
- U.S. GDP forecasts are being revised lower as global growth has been disappointing.
Opportunities
- With the economy weak and concerns brewing about an additional financial crisis, the Federal Reserve will remain accommodative for some time and bonds appear well supported in the current environment.
Threats
- There is a crisis of confidence in world leaders at the moment and the potential for another financial crisis is rising.
