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Sullivan's Market $ense

Brian B. Sullivan, CFA, President and Chief Investment Officer, Regions Investment Management

June 10, 2014

A column to help investors gain perspective on today's market noise

Weather or Not

Markets anticipate changes in the economy; therefore, understanding what the markets are saying can help in anticipating the future for the economy. In 2013 stocks rocked while bonds languished. The markets were telling us that the economy would improve, corporate earnings would improve, and there was an increased likelihood that inflation would force interest rates up. Indeed, economic data was improving slightly in early January until poor weather clouded over the economy.

Last week we got the revised Gross Domestic Product GDP information for the first quarter. It was awful, at -1.0%. The weather was so bad that the economy actually shrank.

Most economists expect a strong economy for the rest of the year, and a bounce-back bump for at least the second quarter. Estimates for the second quarter range from 3% to 5%. Preliminary data from April and May indicate the quarter is starting off strongly. Home prices are rising rapidly, home sales are up, housing starts are up, unemployment is down, employment is up, consumer confidence is high and rising, business confidence is rising, and inflation is rising.

But in a most confusing move, the markets seem to be predicting a slide in GDP. Bond yields are down more than ½% since the start of the year. Bond investors are clearly not worried about economic growth which is fast enough to ramp up inflation. In fact, ten-year yields are coming down while inflation is rising. Inflation, depending on the measure, is between 1.7% and 2.0%, while ten-year Treasury securities are yielding only 2.44%. In historical terms this is an extremely small premium to inflation. Investors are seemingly willing to invest in a bond which yields only ½% more than inflation-- or else they think inflation will fall.

This time, faced with choosing between investors’ predictive ability and the hard facts of economic growth, I am going with the facts. The economy is growing more rapidly and weather was masking the results. Bond investors are wrong this time.

 

©Regions Bank, Member FDIC. The foregoing represents the opinions of the author, Brian Sullivan, and not necessarily those of Regions Bank or Regions Investment Management, Inc. (RIM). RIM provides commentary to clients of Regions Bank, an affiliated company wholly owned by Regions Financial Corporation. The information contained in this report is based on sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This report is designed to provide commentary on market strategy and the opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. RIM assumes no responsibility or liability for any loss that may directly or indirectly result from the use of such information by you or any other person. Investments discussed in this report are not FDIC-insured, not deposits of Regions Bank or its affiliates, not guaranteed by Regions Bank or its affiliates, not insured by any government agency, may go down in value, and not a condition of any banking activity. Investment advisory services are offered through RIM, a Registered Investment Adviser. RIM is wholly owned by RFC Financial Services Holding LLC, which in turn, is a wholly owned subsidiary of Regions Financial Corporation.

 

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