The plural of anecdote is not evidence.”
– Attribution contested
The real voyage of discovery comes not in seeking new landscapes but in having new eyes.”
– Marcel Proust
Economic Perspective
Last year’s stock market advance gives promise of a more robust economic recovery in 2014. Record exports and the smallest trade deficit in four years. Healthier consumer spending, including the strongest automobile sales since 2007, spurred by a booming stock market and an improving housing sector. And a slow but steady pickup in job creation. Finally, we see improvement in hiring, the ultimate lagging economic indicator. Employment accelerated in the final quarter of last year and the first weeks of this. Both jobless claims and the unemployment rate (now 6.7%) slipped to pre-crisis levels. Of course, labor force participation slipped to levels not seen since the late Seventies.
New forces are boosting corporate fortunes. Energy costs, thanks to shale, have dropped. And big U. S. trade talks under way could further energize markets in Asia and Europe.
The euro zone muddled through in 2013. Nevertheless, while Europe may be escaping a mild recession that only postpones European political leaders’ obligation to work harder for euro reform. The French must work more than 35 hours per week. And, guild-like labor rigidity in Mediterranean Europe must yield to economic liberalization, if they hope to compete with northern Europe, especially Germany, and the rest of the world. Challenged by a sovereign debt crisis and inadequate bank capitalization in selected markets, Europe must stimulate economic growth region-wide. Further, talk of Free Trade Agreement negotiations between the US and the EU bolsters market and economic prospects.
However, many structural problems remain unaddressed in the United States. Most prominently, major financial institutions, like J.P. Morgan Chase, remain “too big to fail.” Few of the major reform initiatives of the Administration have been implemented and major sectors of the economy remain overleveraged, especially real estate. Serial Federal budget deficits, exacerbated by absence of entitlement cost reform, continue to drive up the national debt and, more importantly, the debt-to-GDP ratio.
Market Prospects
In the long run, financial markets exist to facilitate the efficient allocation of capital. Short term they give market participants premature ulcers. A new Federal Reserve Board chairwoman (endowed with a Yale Ph.D.) must carefully calibrate the tapering of the Fed’s expansive bond buying. Excessive tapering would hamper an accelerating economic recovery.
The year opened with a stumble in stock prices. Nevertheless, stocks are likely to advance against a backdrop of Federal Reserve sanctioned low interest rates. Corporate spending is expected to fuel growth as companies’ spoon cash hoards into a belated cycle of replacement business capital investment for information technology and telecommunications equipment. Revived mergers and acquisition activity is another likely prominent use of cash especially with low natural gas prices. Already Suntory is buying Jim Beam. The consumer’s improved balance sheet offers some prospect of improved retail sales.
Geopolitical risks cloud the outlook. The armed insurrections in Syria and Iraq may put more Arab regimes into play. In an effort to navigate the treacherous market waters we emphasize sectors like: more resilient large cap names (General Electric); the out-of-favor pharmaceuticals (Bristol Myers, Merck, Pfizer); entertainment (Liberty Global, Disney, Comcast); technology (EMC, Microsoft, Cisco and Google), dividend plays like Digital Realty and ONEOK Partners; and specialty manufacturing (Colfax, FlowServ, Hyster-Yale, Wabtec and Xylem).
Stephen K. Bache, CFA
Sources: Business Week, The Economist, Los Angeles Times, New York Times, The Wall Street Journal, , Leo Damrosh. Jonathan Swift; John Eliot Gardiner, Bach: Music in the Castle of Heaven
