03.22.12: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s our opinion on four major decisions that could have impact on markets and investors:
1. First, here’s a “week-in-a-glance” view of what’s been happening. Monday through Wednesday has already given us a heavy “housing dose, “as Monday saw the release of The National Association of Home Builders housing market index. Further housing numbers for February were published Tuesday and the National Association of Realtors released home sales data (also for February) on Wednesday. Tuesday also had a substantial political component, as Romney was victorious in the Illinois primary and the Senate Banking Committee began hearings on Obama’s nominees for two Federal Reserve vacancies. Today will see The Conference Board post its index of U.S. leading indicators for February while we will also get preliminary reports on Japanese trade numbers. The week will end much the same way as it began on Monday, with even more data on new home sales for February being published on Friday. Saturday brings the Louisiana Republican primary.
What does this mean for investors? That markets could be seeing the “beginning of the end” of the housing crisis. So much of the confidence in U.S. financial markets is tied to housing markets and the multiplier impact that it has across so many sectors of our economy. If we can really get that part of our economy moving, what a positive force it could be! So many of the “doldrums” that we have felt over markets since 2008 have been directly related to housing. Here’s to hoping that this is beginning to be less of a drag on the American economy for the long term.
2. Here’s a little deeper look at the housing situation just mentioned. Real estate agents from Florida to the Midwest to California are reporting more activity as buyers take advantage of prices that are down by one-third from their peak as well as low interest rates that have made housing more affordable than at any time in the last decade. However, it isn’t quite clear that more people looking to purchase homes currently will translate into more sales later this year, as the mildest U.S. winter in decades may have “shifted” buyers’ timing. Still, many economists say home sales and construction have likely hit bottom and are now starting to contribute to the nation’s economy.
What does this mean for investors? A housing stabilization could be a potent “third phase” in a recovery that began in 2009. Growth in manufacturing has already outpaced expansion in the broader economy and the job market has picked up as of late, so adding in better housing component could help consumer confidence (and thus the markets) considerably.
3. Manufacturing continues to be a bright spot for the economy. The Federal Reserve reported last Friday that manufacturing output grew 0.3% in February, the third straight month of expansion. This comes on the heels of a 1.1% increase in January, driven primarily by sales of cars. The Fed data also confirms numbers by the Institute of Supply Management showing continued, but slower, expansion. Manufacturing output has been positive for five of the last six months, with only November showing a slight percentage contraction.
What does this mean for investors? Growing factories hire workers, and workers spend money. As consumer spending habits are 70% of the U.S. economic base, we need manufacturing employment growth to translate into more goods purchased in restaurants, clothing stores, movie theatres and other retail locations. Also, innovative and quality manufacturing is imbedded deeply in the American psychology, providing the economy with as much of a “morale boost” as anything.
4. Just where are we right now on the improving economy and the threat of higher oil prices? As of this point, rising oil prices have not stalled the U.S. economic recovery, but it doesn’t mean they won’t in the months ahead. Higher oil prices really can “fan out” in impacting an economy negatively, sapping consumer confidence, lowering consumer spending, driving up prices and ultimately slowing hiring and investment. The good news is that it hasn’t happened yet. This past Friday, a Thomson-Reuters University of Michigan report recorded a slight decline in consumer sentiment from its previous reading, but above levels recorded at the end of 2011 when prices began to rise. Economists say oil’s impact on the economy will ultimately be decided by the answers to four questions: (1) How high will prices go? (2) How fast will prices rise? (3) Why are prices going up? and (4) How strong is the rest of the economy?
What does this mean for investors? The answer to question (4) makes us feel a little better in 2012 than 2011. Last year, oil prices tested the strength of the U.S. economy and the economy failed the test. This year, the job market is healthier, manufacturing is better, the housing market is showing signs of life and the situation in Europe is somewhat under control (at least for now). The fact that oil prices haven’t derailed the recovery implies a level of stability that has been absent for the past couple of years.
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Senior Vice President
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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