Macro Commentary
Gifts keep coming as the holidays come to a close. While volumes have been seasonally light as expected, there has been little if any disruption to most global equity markets’ recent bounce higher. The United States released a revised Q3 GDP growth estimate restating the number to 5% annually – the strongest quarter of growth since 2003. Consumer spending was a major contributor and capital expenditures were adjusted higher. As confidence in the resilience of the US economy grows, so have wages/income and the willingness to spend. In November alone, wages grew 0.5% month-over-month which translated into a 0.6% jump in consumer spending (as the savings rate came down). Perhaps this good cheer has led the US equity market to slowly creep up as 2014 comes to its final days. Generally speaking, a positive trend in equity markets going into a new year is supportive of that trend continuing to deliver positive performance. According to a research report from Strategas, 94% of the observations of the S&P 500 since 1950 has resulted in positive performance when the trend to start the year is positive. The average annual return in these instances is 16%. That would be yet another gift.
Not all the world’s economies have recovered in the same trajectory. Despite Japan ramping up their QE program in a massive way, it has failed to follow through into the real economy as had been hoped. Recent news out of Japan showed industrial production waning while retail sales were contracting. Meanwhile, the headline inflation number (+2.7% year over year) masks the fact that most of the increase came from a pass through of the sales tax hike in April. Not an inspiring outcome for a country that has taken central bank balance sheet assets to 50% of their GDP and their currency 14% lower this year and around 50% lower since Q3 2012. It goes to show that QE itself is not a magic bullet that always finds it target – it still has to be aimed when fired.