November 2013 Economic Outlook
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 rates will remain near these lows until 2015.
- The year-over-year consumer price index (CPI) released in October shows inflation at 1.2%, which is near the level expected. We anticipate it will remain in this range at the next announcement on November 20.
- The $16.7 trillion debt ceiling was suspended in the process of agreeing to re-open the federal government. As of October 29, there was another $300 billion added to the debt. While the final numbers for the government’s fiscal year that ends September 30 are not reported yet, we expect the deficit spending in October alone to be more than one-third of the deficit spending during all of last year.
- Three years worth of work did not show very favorably when the healthcare exchange was rolled out. It seems there would have been a more efficient, effective and reliable way of doing this. Companies like Orbitz, Priceline, Travelocity, Expedia, eBay and Amazon already have secure front line customer interfaces. They have the infrastructure that collects data from nearly every hotel, rental car company and airline on the planet. I suspect any of these companies could have added U.S. insurance companies and built a new frontline interface for the healthcare exchange that worked perfectly in less than three months.
- Real Gross Domestic Product (GDP) is up $252 billion or 1.6% over the last 12 months. This does not look like enough growth to provide a meaningful increase in new jobs. The good news is this growth was organic within the economy as federal spending went down by $50 billion.
- It looks like the Federal Reserve will continue purchasing $85 billion monthly in Treasury and mortgage securities. Expectations for this are to remain in place for another six months or so. There are a lot of estimates as to when the Fed will start to taper its purchases, but nobody is talking about increases. Why would they need to increase purchases? The government shutdown and the prospect of a replay in January might scare away some foreign buyers.
- Ten-year U.S. Treasury bond yields remain in the 2.5% range. Without any catalyst to push them in either direction, we anticipate they will remain in this range.
- There has been an increase in recent headlines suggesting that the U.S. would benefit from higher inflation. Inflation themes take root slowly. Rising inflation hurts bond returns. Shorter maturity bonds maintain more of their value if this happens, but have a lower yield. We try to maintain a delicate balance between generating the best income we can while limiting maturity to preserve value.
- Last month, we felt the stock market would regain traction once the government shutdown was resolved. It did not disappoint.
- Bubbles may initially be identified when the level of market prices become disconnected from the underlying fundamentals. This is a growing concern as the Federal Reserve continues to support asset prices with its quantitative easing (QE) programs. The conundrum is that alternative asset classes have such low returns that stocks tend to be the beneficiary.
- Markets can remain irrational longer than investors can remain solvent. When markets move higher, this old saying does not really apply, but it does remind us that we should not over-allocate money to any single asset class that is not supported by each of our own investment profiles.
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