A November Overview

The markets began a deep correction in late September, lasting through most of October.  They quickly bounced from those lows and have now traded into new high territories.  The equity market continues to draw funds from the underwhelming yields seen in the fixed income markets and solid expansion in the US economy.

Promising economic data emerged recently.  Last week we saw global manufacturing post a robust 0.8%m/m gain in September, with broad-based gains around the world including a 2.7% surge in Japan. Personal spending was relatively soft in September after a strong August, but is now set to turn up sharply.

Also, this week’s readings on US and China October retail sales surprised to the upside driven primarily by the weakness in oil prices.  Assuming the price of oil remains near $80/bbl, the historical correlations tell us that global consumer goods spending could surge in the current quarter. A fall below $70/bbl into the first quarter of next year would extend the stretch of robust gains into the New Year. This effect is accentuated by the fact that the fall in oil prices is coming alongside large declines in agricultural prices. In other words, food prices and gas prices are down and this should create a cushion for consumers during the holiday season.

The aforementioned lift will have a number of important ramifications for the global outlook that extend beyond the direct benefit to consumer’s wallets. First, a pickup in spending that boosts production should alleviate downside concerns in Europe.  Europe has been a real thorn-in-the-side of global growth as their economies simply cannot seem to gain traction.  Second, the production bounce will be broadly felt, but perhaps be most welcome in emerging market Asia, where improving exports should help to offset the drag from decelerating activity in China. Finally, a stronger growth backdrop would help to keep the Fed on track for a mid-2015 rate hike, even against the backdrop of a temporary lull in inflation.

To this point in the year, the biggest question markets have surrounding global growth come from outside the US.  We are inclined to think that the next move in Euro area growth will be up, with acceleration to a 2% pace for the region starting in early 2015. Our belief is that lower oil prices and the strength of the US economy will pull the rest of the world out of their doldrums.  However, if we begin to experience the opposite, we will not hesitate to take a more conservative stance in our portfolios.

A October Overview

The markets have turned down recently due to disappointing global growth news. Our biggest concern is a downturn in the German economy. Germany has been a stalwart within the European Union. A slowdown in that part of the region may mean a double-dip recession. We are not convinced of that reality just yet.

We are monitoring another possible threat of deflation. Deflation is an economic scenario where we experience falling prices. On the surface it may seem like a positive, but it is hard to fight deflation as it is typically caused by lower economic demand. We are watching this trend particularly in Europe and China.

Technically, the market has broken a pretty significant up-trend line. This leads us to believe the most recent drawdown may last longer than the other four or five short-term corrections we have experienced in the last twelve months. In reality, surprisingly, we have not seen a 10% correction in the markets since 2011. A correction is due. We do not believe this market correction will lead to a new bear market. However, it will probably be longer in nature and a bit deeper than what we have recently experienced. That said, we are confident that the markets will eventually trade at higher prices and we are looking for sector rotations that we can capitalize on during this time frame.

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