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Charles Schwab Report CHARLES SCHWAB on the US Market
Over the last few weeks, U.S. equity indicies have hit record highs, largely ignoring tensions in Ukraine and Russia. Action illustrates why looking longer term is important, but investors should be prepared for the possibility of a more substantial pullback in the near term.
The sharp pullback from mid-January through early- February; followed by an even sharper
rebound to
all-time highs immediately following the escalation of the Ukrainian crisis illustrates why trying to time the market is extremely difficult. Global conflicts are almost always an unknown,
and rational
decisions are often replaced with political considerations, which are hard to predict.
With regards to weak economic data, we feel that much of the December through March data has been distorted by severe weather. One data
point to help
validate this belief: according to Weather.com, ice coverage on the Great Lakes is close to 92%, the highest level since 1979 and very close to a record. And in February alone, over 600,000 people had a job but didn’t work because of the weather which is double the normal rate, according to the Household Survey of employment. But while we often say we can’t predict the future, we can be
News from the Institute of Supply Management’s (ISM) Manufacturing Index said it jumped to 53.2 in February from 51.3 in January, while new orders ticked up 3.3 points.
Also, the Markit
Purchasing Managers Index (PMI), which is increasingly replacing the ISM as the manufacturing survey of choice, posted a robust 57.1 reading for February. We believe that companies will increasingly spend on capital improvements this year,
which should help
both manufacturing and technology
companies.
Corporate cash balances remain near record -highs, the
extended, and confidence appears to be improving.
US job growth for February surprised on
sure that weather will begin to warm up and economic data could become more reliable.
tick slightly higher to 6.7%, driven by an increase in the labour force participation rate. And more recently, we’ve seen a healthy decline in initial unemployment claims, a leading indicator for the US economy.
replacement cycle is the upside,
showing 175,000 jobs were added, while the prior two months were revised higher. The unemployment rate did
The Federal Reserve has also blamed much of the recent economic softness on the weather; and continues to remain committed to tapering its asset purchases at a pace of $10 billion per meeting. The Fed does remain data- dependent though and would likely change course if it viewed the slowdown as something more serious. Fed Chairwoman Janet Yellen continues to express dovish sentiment, recently reiterating that the Fed will do all it can to ensure the U.S. recovery remains on track, but that the US economy is still not as healthy as it could be. This could help to soothe investors’ concerns about a
premature exit
from quantitative easing (QE), although we continue to believe there are risks
Kully Samra 17
that may not be recognised regarding the unwinding of unconventional monetary policy.
In sum, concerns over growth and geopolitical issues have largely been set aside by investors in the United States, but complacency can be dangerous and another pullback in the near term could unfold if history holds. Investors should keep longer term goals in mind and remember that trying to time the market is an extremely difficult task. The weather is turning and economic data will be watched to see if recent
softness was temporary or something more serious. We lean toward the former, but a retrenchment in bond yields would cause
some
concern about the potential for something more than weather.
Content is compiled from
previously published articles authored by various parties at Schwab. Questions or comments concerning this article may be directed to Kully Samra, Managing Director for Charles Schwab, U.K, Limited at