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A weekly snapshot of economic and financial markets news, and Wilmington Trust's investment views.

April 11, 2014

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Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

April 4, 2014
  • The Bureau of Labor Statistics released the latest jobs numbers this morning, stating that the economy added 192,000 new jobs during March. This number is in line with results for the last couple of months, but failed to show any rebound or catch-up from low showings in January and February. While the latest job number was enough to keep unemployment unchanged and markets relatively calm, it leads us to more questions. What is the underlying trend? What more can we learn from April's results?
  • The president of the European Central Bank announced yesterday the ECB's willingness to consider open market actions to address the sluggish expansion of Europe's economy. Since Europe has historically had a different relationship to economic financing than the U.S., relying more on bank lending than financial markets, we think the form of action could be the ECB buying loans rather than sovereign bonds. We still see Europe, excluding Germany, struggling with very slow growth and depressed pricing, while Germany has seen much better economic activity and increasing credit. The disparity between Germany and the rest of Europe makes the ECB's actions more difficult—and all the more important.
  • The U.S. news cycle this week now includes high-frequency trading as a topic, with the new Micheal Lewis book, and its hype, hitting the market. While we haven't had a chance to read the entire book, we think it is somewhat one-sided in its portrayal of markets and trading. Certainly, the increase in technology makes everything more complex; but we have seen benefits that include the narrowing of bid/ask spreads and an increase in market makers. While some have profited from this advance, most investors who buy and sell securities have also benefited, since we enjoy today the most liquid financial markets in history.
  • We will begin to see earnings reports in the next few weeks as companies tell us how the first quarter of the year progressed for them. From a financial viewpoint, we have seen interest rates, as represented by the 10-year US Treasury, remain relatively stable (near 2.70%) and, while volatile, stocks have eked out a gain for the year so far. We continue to view stocks as favorable relative to bonds—though not giving us anywhere near 2013 results—and continue to believe that economic growth and the consumer will continue to favor more growth-oriented stocks. We also think, as we mentioned above, that for now a bias to the U.S. is still prudent; we like the dividend yields on international stocks, but want to see a more sustained recovery before we jump into global stocks with both feet.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 28, 2014
  • U.S. consumer spending rose the most in three months due to an increase in personal incomes. The Reuters/University of Michigan Consumer Sentiment Index was down 1.6 points to 80, while the Conference Board's Consumer Confidence Index rebounded. Still, according to both measures, the longer-term trend is up.
  • Real GDP growth for last quarter was revised upwards to 2.6% year-over-year from 2.4% due to strong personal consumption expenditures.
  • New home sales fell 3.3% to a 440,000 annual rate, the lowest in five months, but about average for the last year or so. Existing home prices, based on the S&P/Case-Shiller index, rose in January, reaching their highest level since the spring of 2008.
  • Generally speaking, equities in developed markets have been relatively flat this month, while emerging market stocks have shown some life, rising about 3%. Meanwhile, the 10-Year U.S. Treasury Bond yield of 2.7% has not closed above 2.8% or below 2.6% all month.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 21, 2014
  • Global equities slumped after Janet Yellen's unexpectedly hawkish comments indicated that the Fed could raise interest rates "around six months" after it fully winds down QE, which is much earlier than expected. Yellen said the falling unemployment rate, which overstates the health of the economy, will not overly influence Fed policy. The Fed will cut bond purchases by another $10 billion a month.
  • Ukraine plans to pull its troops out of Crimea, effectively accepting Russia's annexation of the province. Ukraine will now fortify its eastern border with Russia, which has apparently been massing forces nearby. Meanwhile, EU leaders will look to agree on further sanctions against Russia at a summit that starts today.
  • Despite the above, the U.S. stock market is having a good week as investors digest positive economic news. The U.S. index of Leading Economic Indicators rose 0.5%, surpassing the Bloomberg consensus of 0.2%. Job market growth, climbing home values, and record stock prices are increasing household wealth and will contribute to confidence.
  • All but one (Zions Bancorporation) of America's thirty largest banks passed the Fed's annual stress test. Looking at the bigger picture, we note that measures of financial stress from Bloomberg and the St. Louis Federal Reserve are at pre-crisis levels.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 14, 2014
  • Janet Yellen will get to chair her first Federal Open Market Committee meeting this week. Expectations are solidly behind the view that no change will take place in the tapering program, as the Fed will likely cut their monthly purchases to $55 billion.
  • However, the Fed will likely find itself presiding over an economy that is showing more stress points than it had before. Winter weather is blamed for a lot of the recent weaker data; but we can't rule out other factors such as declining consumer confidence and slower hiring trends. We believe that economic growth in the first quarter will be close to 2%, but could rise towards 3% in the second quarter as we rebound from the winter doldrums.
  • The Crimean referendum on Sunday could spark more market volatility, as we expect to see a result that will call for a reunification of this area with Russia—action that further raises the stakes in this confrontation. Western allies have indicated they will not recognize this result, but they seem powerless to stop the potential transfer. More likely, the Kremlin response will be the one that dictates where we go from here. If Putin sees an opportunity to add to his gains by taking control of more sections of the Ukraine, this would likely put pressure on Western leaders to respond, provoking investors to perhaps seek more safety as this confrontation escalates.
  • Beyond the headlines in the Ukraine, we see a number of trends that could challenge investor confidence outside of the United States. While Germany is helping to lead the recovery in Europe, France continues to struggle along with a number of the periphery countries. Abenomics seems to be running out of gas as the policy initiatives have not all helped consumers in Japan—who are also facing a significant VAT tax increase. Chinese growth is difficult to judge, as authorities attempt to deal with the shadow banking system, corruption, and pollution issues.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

March 7, 2014
  • While all of us will be "Springing Forward" with our clocks this weekend, economists are hoping for their own version of moving ahead to a point where harsh winter weather is not distorting economic data. The Beige Book of economic conditions released this week highlighted that U.S. growth is falling behind the pace from the end of last year, with weather blamed for most of the problems, but not all. We are keeping an eye out for any other sources of disruption such as higher interest rates impacting housing.
  • The crisis in Ukraine dominated much of the news and led to dramatic market shifts both up and down during the past week. It seems unlikely that this crisis will end soon, as Russia seems determined to capture some portion of the Crimean region into its sphere of influence. As a result we have seen markets being buffeted by these events. So long as the escalations and provocations are centered on the Ukraine and don't bleed into larger relationships among the U.S., Europe, and Russia, we expect to find ourselves dealing with market volatility but no serious economic impairments.
  • The key data point for this past week was the employment report, which came in better than expected. Total non-farm job creation amounted to 175,000, ahead of the 149,000 expected by Bloomberg's economists. The unemployment rate moved up to 6.7%. Weather was a major deterrent for employment, leading to speculation that the number of job gains might have been considerably higher had the weather cooperated. While the higher unemployment rate may take some pressure off of the Fed to consider raising short-term interest rates, increases in wages of 0.4% last month and 2.2% over the past year have raised some eyebrows about building wage pressures.
  • Given the weather, emerging markets concerns, and now the Ukraine, the underlying synchronized global expansion story has been hard to find, but we still believe it remains the major driver of financial market performance, which dovetails with our allocations favoring equities and developed markets, while limiting our exposure to longer duration fixed income markets and emerging markets.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 28, 2014
  • The U.S. markets quietly climbed to a new closing high this week. We haven't seen a one-day 1% move in either direction in the S&P 500 in a couple of weeks. The VIX, the index of implied volatility, has hovered around 14. The 10-year U.S. Treasury yield has been in the 2.6-2.7% range.
  • Federal Reserve Chair Janet Yellen said the Central Bank is likely to continue tapering its bond buying despite recent weakness in economic data. The Fed is going "to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook." Her remarks left open the option of pausing the taper without indicating an expectation of doing so.
  • Despite the weather, new home sales rose 9.6% in January, its first increase in three months, to an annual rate of 468,000 units. New home prices have risen on a year-over-year basis, but at a slower rate than in early 2013. New home sales data are volatile and not supported by other indicators, while existing home sales are falling. Mortgage applications, historically an indicator of home sales, have dropped in five of the last six weeks, though this may be weather related. We continue to look for improvements in household formation to provide positive impetus for housing demand, house prices, and residential construction.
  • Foreign stock markets have been less sanguine amid tensions in the Ukraine and concerns about growth. Markets overseas have been more volatile than the U.S. recently, but their volatility has been coming down. The European Commission released their euro-area growth forecasts, which call for 1.2% growth in 2014 and 1.8% in 2015. The report was downbeat for the labor market, with unemployment recovering only to 11.7% by the end of 2015 vs. 12.0% currently.
  • The Commerce Department revised its report on U.S. GDP growth to an annualized rate of 2.4% in the fourth quarter of 2013, less than the 3.2% reported last month. Smaller gains in consumer spending, exports, and inventories added drag to weaker government spending. The consensus projects that fiscal spending will be less of a drag and that we will see stronger growth later in 2014.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 21, 2014
  • U.S. and international equity markets generally enjoyed the week, posting modest but positive gains, while interest rates remained fairly stable. Investors continue to keep their eyes on the earnings season, which has been good, and on Federal Reserve ("Fed") news, which continues to support the economic recovery and the current actions by the Fed. This has brought the S&P 500 back up near even for the year. As corporate profits and earnings have continued to show measurable improvement, we believe there is sufficient support for equity returns and our equity overweight.
  • The Fed has been providing a fair amount of commentary this week, with several regional presidents making speeches and the Federal Open Market Committee releasing of the minutes from its January meeting. The Fed continues to see improvements in the overall U.S. economy and is signaling that it could end its quantitative easing by the end of 2014. This could lead to short-term interest rates moving up in 2015.
  • The continued tapering of asset purchases and changes in the Fed Funds Rate are highly dependent on the stability of the economy and some positive inflation. The current low levels of inflation, even with the Fed's monetary actions, give the central bank some worry and less flexibility than they would like. We continue to maintain a half weight in our inflation hedges in large part due to the weakness we see in price increases.
  • Emerging market equities and fixed income have continued to exhibit weakness, and we have been reducing our exposures accordingly. We've been underweight emerging market equities since the second half of 2013, a trend that we expect to continue for the foreseeable future, even though not all emerging economies are experiencing the same problems. Those with more internally supported growth, such as the Philippines, have a more solid foundation than those highly reliant on external financing of their growth, such as Turkey. We do think there is additional weakness ahead, both for equities and for emerging market debt, and look elsewhere for now for opportunities.
  • It's been a tremendous two weeks for Russia and Vladimir Putin. The Olympics, despite a number of technical issues, has been a huge celebration for the host country and has served to highlight the influence that Russia and its leadership hope to have on the world stage. The events in Ukraine and the cost of the most expensive Olympics in history, however, show how far the country has yet to go.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 14, 2014
  • U.S. and international equity markets started the year weak, dropping 5% or more. February, however, has shown a little more support and markets have rebounded to date. This support is rooted in a lack of updates from the new Federal Reserve Chairman, and economic data that seems to be able to blame the weather rather than more structural issues. The S&P 500 has clawed its way back to within 90 basis points (0.90%) of its starting point for 2014; at the same time, international equities are off between 1% and 2% from the beginning of the year—a better footing than where we ended January.
  • As of yesterday, 75% of S&P 500 Index companies had reported fourth-quarter earnings, with per-share profits on pace for a 9.6% rise. About 68% of companies exceeded profit estimates, with an aggregate surprise of 3.5%, while 72% topped sales estimates by a combined 3.5% versus a year ago. Earnings and margins have continued to look relatively positive, and news from firms has been supportive; this has helped equities gain back some of their January slide.
  • As year-end equity market froth has diminished, interest rates have found a range, with the yield on the 10-year US Treasury appearing to find a floor near 2.6% and trading nearer to 2.70%. Inflation has continued to be held at bay and real rates have been somewhat slow to rise as investors continue to look to the central bank. Low inflation is consistent with our longer term outlook, while slower real rate increases have continued to be supportive of equities.
  • Federal Reserve Chair Janet Yellen made her first public comments. Generally in line with prior Fed commentary, they were soothing to markets. Her thoughts about labor continue to point to our concern that our high rates of unemployment are partially the result of U.S. businesses, and manufacturing specifically, having found more permanent ways of increasing efficiency without adding substantial new jobs. This poses questions about how much the Fed can do. For now, their accommodations remain a positive for markets and felt wealth.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

February 7, 2014
  • Job growth for January lagged expectations, with nonfarm payrolls expanding by 113,000, up from December's 75,000 but well below the consensus of 175,000 and the average of 194,000 per month last year. However, the news isn't all bad. The unemployment rate fell to 6.6% from 6.7% in December, while work-force participation rose slightly.
  • Initial jobless claims fell, household employment rose, and Automatic Data Processing (ADP) reported an increase of 175,000 in private sector jobs, which should temper negative sentiment over today's employment report.
  • Monday's widespread U.S. equity market decline featured some elements of capitulation. Gains later in the week point to stability in the U.S., and even emerging markets showed some signs of improvement. The situation remains fragile, but we are beginning to see signs that markets are trading better.
  • With 63% of S&P 500 Index companies reporting, index earnings are on pace to rise 9.5%, up from the 7.6% projected at the start of the year. So far, 70% of companies have topped profit estimates, delivering an aggregate surprise of 3.7%
  • Market volatility early in 2014 likely stemmed from beginning the transition from reliance on central bank support to self sustained economic growth. Uncertainties over how strong this growth will be, how much corporate profits can expand, and how well the rest of the global economy will follow the U.S.' lead have caused last year's rally to stall.
  • We remain confident that the U.S. economic expansion will emerge as a leading force and enable equity markets to regain their footing. Thus, we continue to expect stocks to outperform other asset classes and we remain overweight equities in our asset allocation strategies.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 31, 2014
  • The Federal Open Market Committee scaled back its monthly bond purchases to $65 billion from $75 billion in January and $85 billion last year. Despite weather related anomalies, the Fed painted an improved picture of the economy, noting gains in spending and business investment. The Fed remains data dependent but, given the prospect of economic growth in the 2.5% to 3.0% range for 2014, we expect these purchase reductions to continue throughout 2014.
  • The U.S. economy grew 3.2% in the fourth quarter, bringing growth up to 3.7% for the second half of 2013. Growth was led by gains in consumption, private investment, and exports.
  • Ultimately we expect financial markets to be led by U.S. economic growth supporting stronger earnings; these GDP trends bode well for markets despite the rough start to 2014.
  • Turmoil in emerging markets continues and investors were further exasperated by a reported decline into contractionary territory of the HSBC/MarkitManufacturing PMI. We do not see an early end to this volatility but, at the same time, it is not likely to threaten growth prospects in the U.S. either.
  • With 48% of S&P 500 Index companies reporting for the fourth quarter, EPS growth is on pace for 6.1% growth in per-share profits. Earnings have beaten for 77% of companies and by nearly 3.9% versus expectations, with outsized strength in financials, health care, and basic materials.
  • Revenue beats are also occurring for 70% of companies, much stronger than the 50% range in the prior four quarters. Companies among the industrials, financials, health care, technology, and energy sectors have all beaten revenues significantly.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 24, 2014
  • As we watch markets begin 2014, we see two stories: Improving earnings for U.S. companies and increases in their profit margins, and signs of initial weakness in U.S. and international stock prices. Almost a third of the S&P 500 have reported earnings so far, and the numbers are generally positive, with decent top line growth, better margin growth as companies continue to control costs, and relatively optimistic comments about 2014 overall. However, the stock markets have been somewhat sloppy so far, with sharp moves yesterday.
  • Yesterday's price movements pushed most equity indices into negative territory for the year to date. The S&P 500 is off 1% so far in 2014, and the MSCI All Country World is off a similar amount, with most of this coming from yesterday's pullback. To some extent, a breather is not completely unexpected, given the way markets finished 2013, up double digits in the last quarter. However, we do not see the news of continued strength in underlying business activity and earnings reflected in current prices.
  • Concerns about emerging markets, particularly in Argentina, Turkey and China have weighed on equity markets as we start the year. Expectations were floated yesterday suggesting that the Purchasing Managers' Index for China fell from December into January due to slowing factory orders, pointing towards future weakness for the world's second largest economy. This is combined with weakness in several emerging market currencies due to movement of external investing in those markets while central banks try to stabilize their currency's value. Emerging market stocks are off around 6% to start 2014.
  • Lessons learned from last October's federal government shut-down will play into the still-unresolved debt ceiling debate. Congress is less inclined to engage in the full-on brinkmanship that damaged both of the national political parties, as well as the confidence in an economy that would otherwise be in a stronger recovery mode.
  • Notwithstanding some of the concerns noted above, we still believe that stocks will outperform bonds and we are comfortable with our asset allocation recommendations. Ultimately, we expect the better economic and earnings picture to emerge. Market volatility after a strong upwards move is not unprecedented and this can help traders and investors find where the market has solid support, a key ingredient if it is to move ahead with confidence.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 17, 2014
  • Earnings season has begun. Forty-five companies representing 12.9% of S&P 500's market-cap have reported so far. Revenues and earnings are beating expectations by 1.0% and 1.2%, respectively. However, ex-Financials earnings have come in 0.3% below.
  • The President is expected to sign the $1.1 trillion spending compromise passed by the House and Senate. Reality check! Is the gridlock breaking up ahead of the midterm elections? This agreement removes one source of uncertainty from the markets, at least for several months.
  • U.S. Treasury Yields are trading near 1-month lows, as reports show housing starts and building permits declined last month. We pay more attention to trends than to individual data releases—which are subject to revision, and are influenced by non-recurring events like extreme weather.
  • Retail sales were up 4.1% year over year through December, a solid, but unexceptional, report.
  • The stock market continues to drift sideways, with the S&P 500 only a few points from where it began the year.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 10, 2014
  • Europe continued to struggle with economic doldrums and worries about deflation, particularly in peripheral countries such as Spain.
  • In response to a December inflation measurement of only 0.8% for the euro zone, European Central Bank President Mario Draghi stated yesterday that the central bank stands ready to act aggressively if necessary to stimulate the economy.
  • December payroll numbers released this morning were lower than even the most pessimistic forecast. New job creation was only 74,000 for the month, far lower than November's corrected increase in jobs of 241,000, but pushing the unemployment rate slightly lower to 6.7%. The number is so low that many forecasters, and to all appearances the market itself, believe it may need to be materially revised. The initial stock market reaction was neutral, rather than downward.
  • U.S. stocks started 2014 rather slow after such a strong showing in 2013. The S&P 500 is off -0.6% as investors consider the current valuations and earnings growth for equities, while international equities have fallen -1.9% as measured by the MSCI ACWI ex US index, with emerging markets falling more than -3.4%.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

January 3, 2014
  • The S&P 500 Index returned 32%, including dividends, in 2013. The index now has a five-year streak of gains, four of which were double digits.
  • Developed international stock markets (the MSCI EAFE Index) rose just under 23% last year, while the MSCI Emerging Markets Index returned about –3%.
  • The broad market of taxable, investment-grade bonds (Barclays U.S. Aggregate Bond Index) returned about –2%, its worst year since 1994.
  • Have stock prices gotten ahead of the economy? We've heard the question. For now we view the trend as our friend, and we are not going to fight the Federal Reserve.
  • We expect 4Q S&P 500 earnings of $28.60 per share, which would bring total 2013 earnings to $110.02, up 6% from 2012. Our 2014 forecast is $118, which implies a 7.3% growth rate over 2013.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

December 20, 2013
  • The Federal Reserve's decision to begin reducing its monthly bond purchases lessens market uncertainty and likely will lead to a wider recognition that economic conditions are improving. Investors' reactions have been reassuring.
  • With only seven trading days remaining, it has been a remarkable year for investors, with stocks trouncing bonds. Indeed, if its current lead holds up, the S&P 500 Index will outperform the Barclays U.S. Aggregate Bond Index by the widest margin for a calendar year since the bond index's introduction in 1976.
  • The U.S. Commerce Department this week raised its estimate of 3Q U.S. economic growth from 3.6% to 4.1%. Gains in energy, food, and health care spending accounted for most of the increase.
  • We see these developments as supporting our view that stocks likely will continue to outpace bonds and inflation hedges in the coming months, a view which is manifested in our recommendation to overweight stocks in our model asset allocation strategies.
  • While our immediate outlook is refreshingly clear of discussions on pending systemic risks and other crisis impediments, we are mindful of numerous potential problems, including impacts from higher interest rates, slower than expected European growth, and declining corporate earnings momentum.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

December 13, 2013
  • A tentative fiscal pact in Washington improves the odds that lawmakers may avert another government shutdown—which otherwise could happen early in the New Year—and enact their first budget in four years. If that happens, business and consumer confidence should improve. It also would strengthen, on the margin, our confidence in the U.S. recovery.
  • Inflation remains dormant in the United States, judging from wholesale price trends in November. Those trends reinforce our view that inflation-hedging assets merit lower than normal allocations.
  • The Federal Reserve's policy-setting Open Market Committee meets Tuesday and Wednesday. Policymakers may announce the beginning of a slowdown in the central bank's $85 billion-per-month bond purchase program, but we think they're more likely to wait until early 2014.
  • We would not expect the Fed's move, whenever it comes, to jar markets as violently as Chairman Bernanke's suggestion of tapering did in May. While markets may be volatile initially, asset prices at this point largely should reflect the coming reduction in economic stimulus.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

December 6, 2013
  • The U.S. economy added 203,000 jobs in November—the third month out of four in which 200,000 or more jobs were created. Manufacturing employment improved for the fourth consecutive month.
  • Stock prices rose in early trading today in the wake of the U.S. Labor Department's November employment report. The report affirms our optimism that the U.S. economic recovery will continue.
  • U.S. economic output expanded at a 3.6% annualized, inflation-adjusted rate during the third quarter, the U.S. Commerce Department said, but an inventory build-up that bolstered the reading augurs 4Q inventory drawdowns and slower growth.
  • Investors appear to have accounted for reduced economic stimulus. Since Federal Reserve Chairman Bernanke first broached, in May, the eventual "tapering" of the central bank's $85 billion-per-month bond purchase program, the yield of the 10-year U.S. Treasury has risen from 1.70% to 2.85%.
  • We believe stocks can continue to rise, even as interest rates climb, so long as the measured pace of the upturn in rates does not give way to large, quick rate spikes.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

November 22, 2013
  • Our Investment Strategy Team (IST) met Tuesday and affirmed the weightings of our model asset allocation strategies, which serve as guideposts for long-term investors with diversified portfolios.
  • Our IST continues to favor stocks over bonds and inflation hedges (inflation-linked bonds and commodity- and real estate-related securities), believing that the economic recovery will endure.
  • Stocks continued this week to reward our optimism. The Dow Jones Industrial Average closed above 16,000 for the first time Thursday and through that day had climbed 22% year to date.
  • The Federal Reserve may slow its $85 billion-per-month bond-buying program "in coming months," as suggested by the minutes of policymakers' October meeting, but we believe the era of "financial repression"—the suppression of interest rates to the detriment of savers and encouragement of investors—is likely to persist for years.
  • With corporate profits and labor markets improving only slowly, we attribute the run-up in share prices largely to investors' expectation of ongoing stimulus.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

November 15, 2013
  • We expect Federal Reserve Vice Chairwoman Janet Yellen to be confirmed to succeed Chairman Ben Bernanke. She may abide higher inflation in pursuit of a strong labor market.
  • Slightly higher inflation could be a good development, as slow rates of price increases in the U.S. and Europe have stoked worries about deflation.
  • Indeed, Spain reported falling prices this week, joining Ireland, Greece, and Cyprus as nations threatened by deflation. Falling prices can halt economic growth and raise the burden of repaying debts.
  • The U.S. Consumer Price Index, due to be updated Wednesday, probably rose 1.1% year-over-year in October, according to Standard & Poor's. We view U.S. deflation as unlikely.
  • A Commodity Futures Trading Commission proposal, if enacted, would declare U.S. Treasuries insufficient as collateral for swaps—derivatives in which counterparties exchange cash flows of one financial instrument for those of another. Rather than merely pledging Treasuries, swap participants would have to back them up with lines of credit. The idea may not become law, but it reflects regulators' efforts to highlight market risks.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

November 8, 2013
  • With 448 of the S&P 500 Index companies having reported their 3Q results, corporate operating profits apparently grew about 4% year-over-year, in line with our expectations.
  • We expect 4Q S&P 500 Index operating profit growth of 6–7% on a year-over-year basis, in line with the consensus of prognosticators.
  • The U.S. economy expanded at a real (inflation-adjusted) annualized rate of 2.8% in 3Q, according to the first of three U.S. Commerce Department estimates.
  • We were not impressed by the stronger-than-expected 3Q U.S. economic growth. Inventory-building, which is ephemeral, played a big role. Personal consumption and business spending were unimpressive.
  • The unemployment rate rose to 7.3% in October, though 204,000 jobs were added to non-farm payrolls, the government said today. Here, too, cautious interpretations are warranted; the government shutdown likely skewed the data.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

November 1, 2013
  • With 360 of the S&P 500 Index companies having reported their 3Q results, our 3–4% estimate of year-over-year operating profit growth remains intact.
  • We expect 2014 S&P 500 index operating profits of $116 per share, up from an estimated $109 this year. Our 2014 estimate is slightly conservative relative to the consensus of prognosticators.
  • A Bloomberg survey on Thursday revealed a 2.0% consensus estimate of 4Q U.S. economic growth, down from 2.4% in early October. Our estimate has been 2.0–2.2%.
  • The risk of falling consumer prices remains widespread. The Fed's preferred gauge of U.S. inflation, for example, read 1.2% in August, well below its 2.0% target. And euro-land inflation fell to just 0.7%, annualized, in October.
  • Downward price trends discourage spending by consumers who wait for better deals, slowing economic growth. We view U.S. deflation as a risk to be monitored but a low-probability event.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]

October 25, 2013
  • Roughly 200 S&P 500 Index companies have reported their 3Q profits. The results have validated our 3-4% estimate of year-over-year profit growth.
  • Underwhelming government reports on September labor market conditions probably will encourage the Federal Reserve to continue buying bonds—to spur growth—until 2014.
  • This week our Investment Strategy Team increased our model investment strategies' allocations to small-capitalization U.S. stocks and reduced their commitments to fixed income securities.
  • The shifts reflect our beliefs that the tepid economic recovery will continue and corporate profits will grow, if modestly.
  • Our models now reflect a distinct preference for stocks over bonds, cash, and inflation hedges, although the latter trio offer ballast to equity risk.
Financial Markets Dashboard [pdf]
Economic Dashboard [pdf]
Investment Policy Dashboard [pdf]





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© 2014 Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by
M&T Bank. Investment Services, Wealth Advisory and Corporate & Institutional products and services are offered by Wilmington Trust Company,
operated in Delaware only, and Wilmington Trust, N.A. International Corporate & Institutional services are offered through our international affiliates.

 Investments: • Are NOT FDIC-Insured. • Have NO Bank Guarantee. • May Lose Value. 
Brokerage services and insurance products are offered by M&T Securities, Inc. (member FINRA/SIPC), not by M&T Bank, Wilmington Trust or Wilmington Trust NA.

M&T Bank and Wilmington Trust, N.A. are Members FDIC and Equal Housing Lenders NMLS #381076 Equal Housing Lender