December 2013 Economic Outlook

Sweeney, Greg

Read our Economic Outlook, a monthly newsletter authored by Greg Sweeney, CFA, chief investment officer at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 28-year veteran of the Investment Management team.


Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on December 18, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed continues to indicate that rates will remain near these lows until 2015. We hear whispers that it could be longer.


  • The year-over-year consumer price index (CPI) released in November shows inflation at 1%. Energy prices are down, but we don’t expect much variation from this number when new data is released on December 17.

Economic Activity

  • Fiscal year-end September 30 statements from the federal government showed total debt outstanding at $16.7 trillion. As of the statement on November 27, 2013, the total debt outstanding was $17.2 trillion. We track this data because it is one way to determine how well the economy is doing. A stronger economy means higher taxes and lower deficits. Adding a half a trillion dollars to national debt in two months suggests the economy may be more sluggish than economic data portrays.
  • As of Monday, December 2, the reports on Black Friday weekend shopping were already available. There were 2 million more shoppers, but sales were down 2.9% over last year. This is the first spending decline since 2009. Look for this to mean better consumer deals throughout the holiday season as retailers compete.  This is also the sort of data that helps us get a feel for how the individual consumer is doing. The result is consistent with the lack of real income growth that we see in the data we track.
  • The lack of increase in real income is one of the indicators suggesting the Fed‘s Quantitative Easing (QE) program is having a hard time reaching all the way to the consumer. Sure, it has lowered interest rates for those fortunate enough to be able to refinance their homes, but the real benefactor appears to continue to be Wall Street. The effect appears to be pushing consumers who are building retirement portfolios toward increasing levels of portfolio risk.
  •  This leads us to the topic of this year’s Economic Outlook forum titled, “Looking for the Corner of a Round Room.” We hope you have the opportunity to join us at one of the events in January!

Fixed Income

  • Ten-year Treasury bond yields moved back up in the range of 2.8% from 2.5% last month, mostly on the prospect of new discussions about when the Fed might consider tapering its open market purchases. We do not see this happening in the next couple of months if the Fed is truly data-dependent like they say.
  • As this month ends, we expect to hear another round of budget talk going into January, which could mean more yield changes on the 10-year Treasury bond in either direction.
  • The market tries to assess where interest rates would be without the QE programs currently in place. On average, that appears to be around 100 basis points or 1% higher on the 10-year Treasury than its current level of 2.8%. If the 10-year Treasury yield rises to that level, its market value will fall by about 8%.

Stock Market

  • The history of top line revenue growth in the S&P 500 has progressed from 4.32% in 2010 to 8.43% in 2011 to 3.71% in 2012 and is currently on track for 3.51% in 2013.
  • Earnings before interest and tax (EBIT) growth have been more attractive at 33.82%, 12.37%, 1.02% and 3.72% respectively. Corporations found operating efficiencies along the way, and the low-hanging fruit seems to be gone, as the growth numbers have contracted.
  • We don’t expect a near-term change in the QE program, meaning this can still be a driving force for the stock market. When a change in the QE program becomes more of a concern, the market will tend to look at underlying fundamentals, and it might not like what it sees.

View previous Economic Outlook newsletters.

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