Quarterly Economic Update

THE QUARTER IN BRIEF
U.S. stocks rollercoastered in Q3 2013, but the S&P 500 ultimately gained 4.69% in three months and celebrated another record close on September 18 (1,725.52). The Federal Reserve refrained from tapering its stimulus effort, a move cheered in financial markets worldwide. Global investors sighed with relief as diplomacy headed off a major geopolitical crisis in Syria, and sighed with frustration as bipartisan sparring threatened to shut down parts of the U.S. government and threaten its ability to pay debt. Assumptions of higher mortgage rates didn’t exactly reduce demand for homes; foreign stock benchmarks rose, and so did prices of precious metals.1,2

 

DOMESTIC ECONOMIC HEALTH
Mirroring Q3 2012, the big economic move of Q3 2013 came in mid-September. A year after rolling out QE3, the Fed unexpectedly announced it would hold off on reducing the amount of its monthly bond purchases. Fed chairman Ben Bernanke mentioned that the central bank could be open to a taper later in the year; Kansas City Fed president James Bullard thought it might happen in October.3.4

 

Turning from Wall Street to Main Street, the jobless rate fell to 7.3% in August, down 0.3% from June and down 0.8% in 12 months. Even so, 37.9% of those unemployed in August had been out of work for 27 weeks or longer. Consumer inflation – as gauged by the headline Consumer Price Index – was minor, increasing 0.2% in July and 0.1% in August. The University of Michigan’s consumer sentiment index hit a 6-year peak of 85.1 in July, but slipped to 82.1 in August and 77.5 in September. In June, the Conference Board’s consumer confidence index was at 82.1, the highest in 5½ years; in August, it was 81.8, but in September it fell to 79.7.5,6,7,8

 

Consumer spending increased 0.2% for July and 0.3% for August; consumer incomes increased 0.2% and 0.4% in those respective months. Retail sales figures were similarly decent: up 0.4% in July, 0.2% for August. In September, the Bureau of Economic Analysis made its final estimate of Q2 GDP – 2.5%.9,10

 

On the factory front, the Institute for Supply Management’s manufacturing PMI chronicled a healthy expansion during the quarter, averaging 55.8 (55.4 in July, 55.7 in August, and 56.2 in September). ISM’s non-manufacturing index also reached impressive heights, coming in at 56.0 in July and 58.6 in August. Overall hard goods orders slid 8.1% in July, but managed a 0.1% gain in August; minus transportation orders, they fell 0.5% in July and 0.1% in August. The Producer Price Index settled: after June’s 0.8% rise, it was flat for July and up 0.3% in August, when annualized wholesale inflation was running at 1.4%.9,11,12,13

 

Wall Street and Main Street tracked many other news developments in the quarter. In July, the Obama administration chose to delay one part of the implementation of the Affordable Care Act; the requirement for businesses with 50 or more employees to furnish health insurance plans was pushed back until 2015. Still, online health care exchanges for uninsured individuals opened on October 1 as scheduled. In August, President Obama called for the phase-out of Fannie Mae and Freddie Mac, proposing to replace them with a new system reliant on private sector purchases of mortgages from lenders, with private capital bearing the bulk of any losses. The quarter ended with a partial shutdown of the federal government looming due to an impasse over the federal budget – a partisan dispute that resulted in the first such shutdown since late 1995.14,15,16

 

GLOBAL ECONOMIC HEALTH
When Secretary of State John Kerry stated that Syria’s government had used chemical weapons against its own people in late August, the threat of American military intervention in the conflict between rebels and pro-Assad forces rocked global stock, bond and commodity markets. President Obama said the U.S. would only intervene with the approval of Congress; before that vote could take place, Russia offered a plan to disarm Syria’s chemical weapons stockpiles, one the U.S. accepted. While that conflict eased, global investors certainly had plenty of other headlines to consider.17,18,19

 

Manufacturing growth appeared to be sputtering in both China and India. HSBC’s factory sector PMI for China was but 50.2 in August, and 50.1 in July. India’s HSBC PMI was 49.6 in August; it had been 48.5 in July. The Asia Development Bank estimated China’s 2013 GDP would be 7.6%, and India’s just 4.7%.20,21

 

In better news, the eurozone recession was over: its economy had grown for the second straight quarter in Q2 (0.3%), albeit with the euro area jobless rate averaging 12.0% by August. Unfortunately, Italy’s fractious coalition government threatened to come undone at the end of Q3 when five ministers belonging to former prime minister Silvio Berlusconi’s center-right party quit their posts over a tax hike. This left analysts wondering if Italy would face a credit downgrade, and possibly an emergency election.22,23

 

WORLD MARKETS
Gains were prevalent in the quarter, boosted further by the mid-September announcement that the Fed would not yet taper. Some notable Q3 advances: Shanghai Composite, 9.88%; Hang Seng, 9.89%; Nikkei 225, 5.69%; Asia Dow, 4.33%; Kospi, 7.17%; Europe Dow, 15.56%; STOXX 600, 8.93%; CAC 40, 10.82%; DAX, 7.98%; FTSE 100, 3.97%; TSX Composite, 5,43%; Bovespa, 10.29% … and lapping the field, more or less, Argentina’s MERVAL rose an astonishing 60.73%. Among the big global indices, the Global Dow gained 9.57%, the MSCI World Index 7.68% and the MSCI Emerging Markets Index 5.01%. The Jakarta Composite lost 10.43% in Q3, the IPC All-Share 1.08% and the Sensex 0.08%.1,24

 

COMMODITIES MARKETS
After a disastrous Q2, precious metals rebounded on the COMEX in Q3: gold gained 8.4%, silver 11.5%, platinum 5.4% and palladium 10.1%. Oil futures rose 6.0% in Q3; natural gas was nearly flat for the quarter, RBOB gasoline lost 3.0%, and heating oil rose 3.9%. This has not been a good year for key crops so far: the worst quarter for corn in 17 years and the worst quarter for soybeans in four put those respective futures at -36.8% and -9.6% YTD. Wheat was down 12.8% YTD at the end of the quarter; at least rice stood at +1.8% YTD.25,26,27,28

 

REAL ESTATE
Existing home sales were still up 1.7% in August, the National Association of Realtors noted, with buyers scrambling to lock in rates after a 6.5% gain for July. New home sales fluctuated – down 14.1% in July, but back up 7.9% a month later. As for new residential construction, it was hard to spot a trend – the Census Bureau reported housing starts up 0.9% in August, and building permits down 3.8% (although permits for single-family construction were up 3% in August to the highest level in 5½ years). Pending home sales fell 1.4% for July and another 1.6% for August. Home values – as measured by the S&P/Case-Shiller Home Price Index – had risen 12.4% in a year by July. 9,29,30,31

 

Contrary to the assumption of many, mortgage rates actually declined in the quarter. Eyeing Freddie Mac’s June 27 and September 26 Primary Mortgage Market Surveys, we see the following descents: 30-year FRM, 4.46% to 4.32%; 15-year FRM, 3.50% to 3.37%; 5/1-year ARM, 3.08% to 3.07%; 1-year ARM, 2.66% to 2.63%.32

 

LOOKING BACK…LOOKING FORWARD
The S&P 500 ended Q3 at 1,681.55, the NASDAQ at 3,771.48 and the DJIA at 15,129.67, finishes that lead to the impressive Q3 and YTD numbers seen on the following chart. The Russell 2000 closed at a new all-time high of 1,078.41 on September 26, rising 9.85% for Q3 to end September at 1,073.79; the CBOE VIX fell 1.54% in Q3 and ended the quarter at 16.60.1,2