Charles Schwab Report CHARLES SCHWAB on the US Market
Stocks had a rough start to the year, and US economic data has been mixed-to-weak; which we believe is weather-related but likely temporary. The pullback in stocks may have further to run but uncertain investor sentiment is correcting itself, likely setting the stage for another sustained uptrend.
Stocks have been weaker and more volatile for a number of reasons. Profit-taking and asset allocation adjustments are natural after a great year in 2013. Fed tapering has also unleashed round two of concerns in many emerging markets. Low yields in the United States and developed markets led investors to hunt for higher yields among higher-risk emerging markets. However, now that the Fed has begun to taper, some of that risk is being unwound. There have also been weaker economic releases, including job growth and retail sales that may be indicating a slowdown in the US expansion.
The US market’s weakness has caused many sentiment indicators to move down from extreme optimism levels, which may help set the stage for a potential renewed move higher. This is also a midterm election year for the US, and historically speaking, the S&P 500 posted an average decline of over 18% in every midterm election year since 1962 according to Strategas Research Partners. The good
news is that in every one of those instances, the S&P 500 was higher one year after the trough of the correction, by an average of 32%.
A soft December employment report in the US was followed by another lackluster gain of 113,000 jobs in January, although the unemployment rate did dip to 6.6% which was the lowest level since October 2008. The details of January’s job report announced 650,000 jobs created as per the “household survey”, and the rate declined despite an uptick in the labour force participation rate.
Also on the weaker side, the Institute for Supply Management
(ISM)
Manufacturing Index fell from 56.5 in December to 51.3 in January, with the internal readings on new orders and employment showing similar weakening. However, this weakness was not matched by the ISM Non-Manufacturing Index, which maintained its recent strength.
The recent ISM Manufacturing reading was
a departure from the recent trend, as were the December and January jobs reports. Other data has been more in line with the recent trends we’ve seen; including regional manufacturing surveys and the aforementioned ISM services index. Within the latter, the employment index was notably strong; further reinforcing the view that recent extreme weather state side has wreaked havoc with the published jobs numbers. Also encouraging was Markit’s Purchasing Managers Index (PMI) for manufacturing, which is gaining more credibility relative to the ISM and posted a solid 53.7 reading in January. And one of the most important leading indicators, jobless claims, continues to trend along in the range that indicates a decent labour market.
We saw that congress decided to extend the debt ceiling for one year. However, the controversy over the Affordable Care Act (ACA) continues to simmer, with both sides using incoming numbers to help bolster their
17
case. We share the concerns over the ACA’s impact on the economy. There are increasing stories of companies cutting workers hours in order to not have to provide health insurance, while the healthy/ sick signup ratio appears to be unworkable at this point. Adding fuel to the fire was the recent report by the Congressional Budget Office (CBO) predicting that the ACA will result in over 2 million people leaving the workforce over the next seven years; not a positive for productivity specifically, or the economy overall.
In summary, the recent
slowdown in US economic data appears to be largely weather related and
we
believe decent growth will reassert itself. Stocks have bounced after a weak start to the year, but the threat of a further pullback remains, although our longer-term optimism has not been dented.
Content is based on analysis from Schwab Centre for Financial Research. Questions or comments concerning this article may be directed to Kully Samra, Managing Director
for Charles
Schwab, U.K, Limited at
kully.samra@
schwab.com.
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