May 2013 Economic Outlook

Sweeney, Greg

A low yield environment is plaguing bond investors, but housing markets are benefitting. Read more in 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 27-year veteran of the Investment Management team.


Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on June 20, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed continues to indicate rates would remain near these lows until 2015, but dissension remains among the Fed members on this subject.


  • The year-over-year consumer price index (CPI) released in April shows inflation at 1.5%. April’s 0.5% decline from the previous month was aided by lower energy, apparel, transportation and commodity costs.

Economic Activity

  • The Affordable Care Act (Obamacare) is looking like it will be anything but affordable, with healthcare rates projected by the industry headed noticeably higher than promised. It appears this has not been figured into forward corporate earnings projections yet. Politicians up for election in 2014 who voted for the program are scrambling to figure out how to distance themselves from it.
  • Surveys show over half of Americans once again believe housing prices are headed higher over the coming year. Home sales are up, home prices are up, unsold inventories have declined and more new homes are being built. Housing is benefitting from the low yield environment that is plaguing bond investors who are looking for higher interest income.
  • A survey of 60 central banks by the Central Banking publication and Royal Bank of Scotland show that 23% of central banks intend to acquire stock or increase stock positions they have already started. This action would be a blinking light on our fourth rule of successful investing: Never let the market force you to do things you would not normally do. Low rates are forcing central banks to drink their own Kool-aid.
  • Gross domestic product (GDP) is the measure of domestic production, and its change reflects growth (or shrinkage) in the U.S. economy. There is a lot of consensus (or hope) around 2.5% GDP growth expectations for 2013, but we would not be surprised if that rate is less than that by year-end. First, it does not appear that the foundation is in place to support a 2.5% growth rate without lots of government stimulus, and second, the government is changing the way it calculates GDP – presumably to make the GDP reflect better numbers.

Fixed Income

  • Treasury bond yields began to move lower in March and continued their progress through April. The 10-year Treasury yield is 1.66% at this writing.
  • Yields are lower, because the economy is not performing in line with rosy growth expectations.
  • Job opportunities are still scarce, taxes are rising, personal income is still flat, Europe is lagging and Japan is attempting their own monetary easing program.

Stock Market

  • The stock market does not appear to see the same information that bothers the bond market. The Dow and S&P are near record highs in spite of nearly flat top-line revenue in first-quarter earnings reports and declining forward growth estimates for earnings.
  • This suggests that the influence of the Federal Reserve’s money printing is still the main market theme. The Nikkei Index in Japan is a perfect Petri dish for watching how stock markets respond to central bank open market purchase operations. After about three years of generally declining trends, the Nikkei reversed course like a rocket and is up about 60% in the last four months on news that the Bank of Japan will be implementing Ben Bernanketype QE programs.
  • It is fine for the markets to act this way, but it will take a good foundation of fundamentals to keep them there.

View previous Economic Outlook newsletters.

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