March Economic Outlook
This is a monthly newsletter 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 25-year veteran of the Investment Management team.
Federal Reserve Monetary Policy
- At the next Federal Reserve meeting on March 13, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed indicated this rate would remain near these lows until late 2014.
- The year-over-year consumer price index (CPI) released in February shows inflation at 2.9%. The next release on March 16 is likely to be lower, but energy price changes will make an expected range harder to establish. Our estimate is in the 2.7% range.
- It looks like Greece will receive a second bailout package. We expect this is still not the end of this story, because it does not address the core problem. Monetary policy and bailouts are not the real solution to unsustainable fiscal problems. Plus, these problems are not limited to Greece. We spent the last 20 years buying things with money we didn’t have, and we will spend the next 20 years paying for things we will never get.
- Economic growth will come from consumer demand occuring from everyday living and population growth. This core growth should be in the range of 1.5%, which is better than many other developed countries will experience. We do not see additional consumer debt currently being encouraged by the Federal Reserve’s targeted low interest rates as a big driver for economic growth. Household debt was 86% of gross domestic product at the end of the third quarter in 2011 compared to 47% of GDP back in 1983, according to the U.S. Commerce Department. Federal deficit spending will push measured GDP growth above the 1.5% level, but that is not a sustainable model.
- The prospect of rising energy costs going into the summer months could dent growth expectations.
- The payroll tax cut was extended through the rest of the year, which helps consumers remain engaged – but aggrevates the already significant shortfall in Social Security funding.
- Money from everywhere. Insurance companies, retirees and pension plans are traditional bond buyers that are nearly always in the market. Today they are joined by additional competition from money previously invested in European debt and now redirected to U.S. Treasury bonds, agency bonds and corporate bonds. This helps increase the forces driving yields to the lowest levels in 50 years.
- The Federal Reserve and other major central banks have also added themselves to the mix of buyers over the last few years competing against commercial interests. They really don’t care what yield they receive when purchasing bonds. They have no obligation to clients. Their purpose is aimed at artificially driving interest rates lower in an attempt to benefit a different sector of the economy.
- Since a portion of these low rates is determined by noncommercial interests, investors need to be aware of an “equal and opposite” effect at some point when these noncommercial interests decide to leave the bond market.
- “Don’t confuse the economy with the stock market.” It is not unusual for stock markets to move in directions inconsistent with signals from the economy. Sometimes the long-term perspective of investing finds its way back into the system, and from that angle, stocks look like a better buy than 1.9% yields on a 10-year Treasury bond.
- U.S. stocks seem to refuse to buckle, even with concerns over everything from rising energy prices to pressures on corporate profit margins to questionable European financial system strength. “Risk on” mode appears to be back. Yes, the Dow can move over 13,000, but it may be wise to keep an eye on the door at the same time.