John Davidson’s Economic Comments: Week ending Oct. 12

Mon, 10/13/2014 - 5:00pm

There were few economic releases this week, but those economic releases were not the driving force in this week's stock market rout. Worries and anticipation were the culprits. We are at the beginning of the quarterly reporting cycle. Investors are not so worried about the third quarter earnings reports as much as they are about forward guidance that might be cautious due to a slow-down/recession in the European economies, and the recent dollar strength that might result in lower export sales for U.S. companies. Slowing Asian growth and anticipation of lower demand for energy put downward pressure on energy prices. Despite assurances from well regarded U.S. Federal Reserve Vice Chair Stanley Fisher, investors remained worried about the timing and impact of rate increases by the U.S. Federal Reserve. This was a "risk-off" week with lower equity prices and higher credit spreads for the riskier asset classes; metals commodity prices and government bonds benefited from the "risk-off" trades. The U.S. dollar traded lower on the week.

Perspective:

According to Bloomberg, in the first eight trading days in October the S&P 500 has posted six one-day moves of 1% or more. In contrast there were no one-day moves of that size in the 62 trading days of May, June or July. Volatility has increased; the CBOE Volatility Index increased over two points to 21.24 on Friday, a 55% increase from year-end and 35% increase from a year ago. The S&P 500 is not cheap at 18.6 times historic earnings and 15.85 times projected earnings; at current levels, the S&P 500 offers a 2.01% dividend yield; so, the S&P 500, while not cheap, is not near irrational exuberant levels. Valuations are not driving this volatility. The drivers are economies outside the U.S., but those economies can ultimately effect the earnings of U.S. exporters and the U.S. economy as well.

On Monday the Royal Swedish Academy of Science will announce its winner for the Nobel Prize in economics. Nick Timiraos handicaps the candidates in his article in the Wall Street Journal. (click to read the article)

Economic Releases:

Following the previous week's solid U.S. employment report for September, this week's Initial Jobless Claims continued the good news. For the week of Oct. 4, Claims remained little changed at 287,000. The four-week Average of Initial Claims (blue in the chart) fell to 287,750. Continuing Claims (red in the chart) fell 21,000 to a new recovery low of 2.381 million. The chart shows that the current levels are below those of the pre-Great Recession period.

Other Economic Releases

This week's releases revealed continued softness in Europe, including some downside surprises from Germany. The previous week German Manufacturing PMI fell into the contraction zone. In this week release, German Manufacturing Orders fell -5.7% and Industrial Production fell -4.0% in August. French Industrial Production was flat in August. In the UK, Industrial Production was also flat and Manufacturing Output rose only a tick in August. The Bank of England met and, as expected, made no change in the its policies; the Bank Rate remained at 0.5% and the bond purchases remained at 375 billion pounds.

China's Purchasing Managers' Index Composite and Services each slipped less than a point, but remained in the expansion zone, at 52.3 and 53.5 respectively. The Bank of Japan met and left its rates and bond purchases unchanged.

Equities Markets:

Only the Hang Seng managed to eek out a positive return this week (and QTD). The Dow, Nikkei, FTSE, CAC, Hang Seng and Nikkei are all in negative territory for the year. Factset reports that the Q3 S&P 500 earnings growth is expected to be only 4.5%, down from the 9.0% expectation that analysts had at the beginning of the quarter. In its third consecutive weekly loss, the S&P experienced the biggest weekly decline since May 2012. Energy stocks got hit the most with a double-whammy, expectations of falling demand and declining oil prices.

Bond Markets:

Government Bond yields fell and and the riskier credit spreads widened.

Currencies & Commodities:

The U.S. dollar slipped this week and since the beginning of the quarter, but remained higher than the other four currencies as compared to the beginning of the year. Energy prices declined but metals commodity prices rose on the week.



Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.