May 2013 Economic and Market Commentary
Stock prices continue to rise, but the market's push into record territory has not been driven by economic or earnings data. Rather, stocks are climbing thanks to the continued liquidity support from most of the major Central Banks around the world, including the U.S. Federal Reserve.
Most of the economic data released recently has been disappointing, which indicates that the recovery in growth is faltering. Manufacturing activity in China and other large Asian economies eased in April, Korean exports are falling, and most of Europe remains mired in a recession. In the U.S., economic activity is slowing, and consumers are slowing their spending.
As for corporate earnings, the first quarter reports are winding down, and according to Zacks Investment Research the composite growth is +2.4% in earnings and -0.7% for revenues. These results are further proof that we are still stuck in a mediocre growth environment.
This data is not consistent with the extent of the increase in stocks so far this year, yet investors remain confident that as long as central banks around the world keep the stimuli flowing they don't need to worry too much about the actual data.
One sign that investors have not bought into the economic recovery is that while equity markets are rising, the traditional areas of equity risk-taking such as small caps and cyclicals have lagged the broader market. Investors are being driven into equities by the Fed because of an absence of yield in the bond markets, but they are buying mostly mega cap stocks which are deemed less risky.
While stocks may proceed higher over the near term, we continue to be wary. The market has reached the upper end of our projected range for 2013 and the probability of a short-term correction has risen along with the stock market. The potential catalysts for a sell-off are numerous. Longer term, however, we expect stocks to trend higher as the global recovery in economic activity continues.
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Director, Portfolio Management
Director, Wealth Management
Director, Institutional Services