BOOM – 1Q GDP

By David B. Armstrong, CFA | Jun 02, 2014 | Weekly Market Commentary

So you may or may not have noticed that there was some GDP news last week.  In case you didn’t, the government reported that instead of a very slight 0.1% rise in GDP for the first quarter of 2014, there was actually a -1.0% contraction.  Revisions are typical as more and more data becomes available to the economists.  We will see another report in June on any further revisions.  Business weakness is the culprit for the revision, but remember that we had some really bad weather that impacted business.  Since the weather is an isolated event, no one should be overly frightened or burying gold bars in their yard.  This report measures the broadest measure of the economy from January through March.

And on that note – it’s June.  So this is as put away as your scarf, wool hat, ski gloves and puffy jacket.

 

So I get asked all the time (especially by my wife), “Dave, are you ever wrong?”  Well, yeah…have you seen the move in the 10-year yields?  Remember that when yields go DOWN, the prices of bonds go up in value.  In May of 2013, the yield on the 10-year Treasury Bond hit a low of 1.66% and by December 31^st it was at 3.04%!  Today it is about 2.48%. That means the prices of 10-year treasury bonds have increased this year.  I was wrong that yields would not go back down that much. A round trip of 1.66% to 3.04% to 2.48% is a lot of volatility for Treasury Bonds.  My opinion is that it’s indicating that lower interest rates and easy money may be around longer than some people were expecting a year ago. Of course the yield on the 10-year is up over 6bps today, which is the biggest one day move in the past six months.

REITs, junk bonds and investment grade debt have all been doing well too…and none of this has kept the S&P 500 from reaching new highs.  So much for Sell in May and Go Away!!!!  By the way, if you look at the performance of the S&P 500 in the months of June, July and August for the past ten years, there are exactly five times that the S&P 500 was up over that time and five times it was down.

Coin flip.

Bespoke Investment Group

For those of you who ask if the market has gotten ahead of itself, take a look at the graph below.  Transports are generally considered a leading indicator. The chart below shows a break-out move in Transports.

Employment

The Bureau of Labor Statistics is set to report May payrolls. Last month, it reported nonfarm payrolls grew by a healthy 288,000 in April and the unemployment rate fell from 6.7% to 6.3%. According to Bloomberg, economists believe that payrolls will rise by 213,000 in May and the unemployment rate will tick up to 6.4%.

The unemployment rate has become increasingly important lately amid a growing debate as to how well the closely watched measure accurately reflects the current state of the labor market.

Despite the drop in the jobless rate, which has occurred in part due to a very slow growing labor force, Fed Chief Janet Yellen believes there is still plenty of “slack” in the labor market. It’s why she believes very low interest rates can boost the economy without adding much to inflation.

Others argue interest rates may soon need to rise, else inflation might unexpectedly pick up. It’s a debate we will be watching.

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