Schwab Market Perspectives: Seeing the Forest
February 15, 2013
by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
and Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research
and Michelle Gibley, CFA, Director of International Research, Schwab Center for Financial Research
Key Points
• Equity markets continue to be resilient and investor confidence is elevated in various sentiment indices, suggesting a near-term pullback is possible. But there are longer-term trends developing that give us hope that the US economy's expansion and market's rally are sustainable.
• Federal spending cuts via the "sequestration" appear sure to happen, but there will continue to be debates about the nature and size of the cuts. Similarly, questions are increasing as to the potential unwinding of current Fed policy with regard to timing and rapidity.
• Labor market changes in Europe are relatively small at this point, but the trend is encouraging. Likewise, the rhetoric coming out of Japan has resulted in a strong equity rally, but its durability is still in question.
Resilience may be the best word to describe equity markets over the past several weeks. Despite a robust start to the year—and some disappointing data recently such as a negative fourth quarter gross domestic product (GDP) number, lackluster January retail sales and a renewed flare-up in Europe—equities continue to grind higher. It appears to us this resilience is helping to pull previously-nervous investors out of cash and some fixed income products and back into stocks. Should this nascent trend take hold, we believe it could add fuel the next move higher in the stock market as sidelined cash remains relatively high after five straight years of equity mutual fund outflows.
Elevated optimistic sentiment, a contrarian indicator, gives us some pause in the near-term and the risk of a pullback is elevated. But any correction is likely to be contained and could serve as a decent buying opportunity. But if your portfolios have become out of whack in any asset class, you should not try to time the market in the short term in an attempt to find the best entry/exit points. A better strategy would be dollar-cost averaging over time. Investing should never be about moments in time; but should be a process over time.
Bullish-short…and long-term
Recent economic data continues to indicate to us an environment that is supportive of equities. The stock market seems to appreciate incoming reports that have been neither too hot, which may push the Fed to reduce their accommodation and stoke inflation concerns, nor too cold, which could raise the fear of a renewed recession—modest growth seems to be the watchword.
The four-week average of initial jobless claims remains within shouting distance of 350,000, which indicates a modestly improving job market; regional manufacturing surveys have been disappointing but the national Institute for Supply Management (ISM) Manufacturing Index remains in territory depicting expansion. Further, the ISM Non-Manufacturing Index, which tracks sentiment in the far larger service sector, dipped only slightly to 55.2 from 55.7, indicating continued expansion. A weighted combination of the two suggests a real GDP growth rate of around 3%, but it's been over-shooting actual GDP recently. We're also watching the continued housing recovery as we're beginning to see mortgage rates creep up slightly. If the improvement can continue, or even accelerate as fence-sitters are pushed into action, further fuel to the economic fire could be added.
Service sector continues to expand
Source: FactSet, Institute for Supply Management. As of Feb. 8, 2013.
We remain optimistic about the United States. The innovative and entrepreneurial spirit has not been crushed and there are several key bright spots on the horizon for the US economy. The US manufacturing renaissance we've been talking and writing about for some time is gaining traction among a wider audience. The most recent example was a cover-story in Barron's entitled "Made in America" ("The Next Boom"), which further illustrated our belief that "onshoring" is developing into a long-term trend that can help to propel growth into the future. We continue to see major companies bring their manufacturing operations back to the United States, as the skill and productivity of US workers, combined with logistical advantages, seems to be outpacing the now-rising costs of labor and doing business in many emerging economies.
