Last January, the global economy faced myriad headwinds, choppiness lay ahead, and we expected plenty of volatility. Nevertheless, I said then that risk assets were the best choice for investors. Now, the headwinds of 2013 have largely dissipated, and the outlook is benign for risk assets for the first three to six months of 2014, if not longer.
by Scott Minerd, Chief Investment Officer, Guggenheim Partners LLC
Global CIO Commentary by Scott Minerd
U.S. equities rose by 10 percent in the final three months of 2013, producing a wealth effect that should pay dividends in 2014. Although the unwinding of inventory that built up in the third quarter is expected to be a drag on fourth quarter economic growth, consensus estimates for fourth quarter GDP growth have risen recently to 2 percent. Improving economic performance should translate into greater confidence, making investors comfortable with more risk, suggesting strong U.S. stock market performance in the coming months.
This cycle is now mature, but expansions do not die of old age. Instead, recessions are generally sparked by an exogenous event or a policy mistake. With little expectation that the Federal Reserve will raise interest rates before 2015, the expansion could continue for several more years. Even when the Fed does eventually hike rates, it typically takes another two years before the economy tips into recession.
The upper limit for 10-year U.S. Treasury yields in the coming months should be around 3.4 percent. With long-term yields rising faster than short-term yields, the yield curve has steepened over the past month and now appears consistent with the better economic momentum we’re seeing in the United States.
The environment for corporate credit feels similar to 2004 – 2005, when interest rates rose modestly, but credit spreads continued to contract, leaving absolute yields relatively flat. If that trend repeats itself this year, then there should be continued opportunities in spread products.
The start of the New Year appears to be a great time for investors, who should take advantage of opportunities presented over the next three to six months.
Chart of the Week
Reduced Fiscal Drag in Advanced Economies
Major advanced economies (with the notable exception of Japan) should in 2014 have significantly less fiscal policy drag on growth. Leading the way is the United States, where sequester-mandated budget cuts will decrease and the effects of higher payroll taxes should diminish. The euro zone should also benefit as budgetary austerity fades. Britain should also have a slightly smaller fiscal drag. Overall it’s a rosier picture for global growth in 2014, as economies around the world should benefit from faster growth, especially since demand is improving in advanced economies that make up over 40 percent of global GDP.
ESTIMATED FISCAL DRAG ON REAL GDP GROWTH
Source: Haver Analytics, IMF, Guggenheim Investments. Data as of 1/8/2014.
Economic Data Releases
Strong Economic Data Supports Growth Outlook for Fourth Quarter and Beyond
- The ISM manufacturing survey showed a slightly slower rate of expansion in December, decreasing from 57.3 to 57.0.
- The ISM non-manufacturing composite declined for a second month to 53.0, a six-month low.
- The trade balance narrowed to -$34.3 billion in November, the lowest since October 2009.
- The ADP employment report showed 238,000 jobs added in December, pointing to a strengthening labor market ahead of the payroll report.
- Initial jobless claims inched down to 339,000 for the week ended December 28th.
- U.S. factory orders increased 1.8% in November, in line with estimates.
- Construction spending rose a robust 1.0% in November, the eighth consecutive month of increased spending.
Euro Zone Momentum Continues Amid Low Price Pressure, China Output Slows Slightly
- Euro zone retail sales rose much more-than-expected in November, up 1.4%. On year-over-year terms, November was the first positive month since May.
- The euro zone manufacturing PMI for December was unchanged at a two and a half year high of 52.7 in the second estimate.
- Euro zone unemployment remained at 12.1% for the eighth consecutive month in November.
- The euro zone CPI ticked down to 0.8% year-over-year in December, adding pressure to the ECB to take action.
- German retail sales rose 1.5% in November after two months of decreasing sales.
- German unemployment fell by 15,000 in December, the first decline since July.
- German exports increased for a fourth straight month in November, up 0.3%.
- The harmonized consumer price index in Germany rose 0.5% from November to December, the largest monthly increase since February. In year-over-year terms, the CPI fell back to 1.2%.
- Italy’s manufacturing PMI for December jumped to 53.3, the highest since April 2011.
- The harmonized CPI in Italy fell to 0.6% year-over-year, the lowest in over four years.
- The U.K. manufacturing PMI slowed to 77.3 in December from 58.1 in November.
- China’s HSBC manufacturing PMI showed a slowing pace of expansion in December at 50.5.
- China’s non-manufacturing PMI decreased to 54.6 in December, down from 56.0.
