September 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 September 17, 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, but dissension remains among the Fed members on this subject.

Inflation

  • The most recent year-over-year consumer price index (CPI) hit 2.0% as expected. When the number is released in October and November, expect the direction to reflect a lower level.

Economic Activity

  • To taper or not to taper? Quantitative Easing (QE) is the Federal Reserve program aimed at buying Treasury- and mortgaged-backed bonds in the open market in an effort to drive yields lower. Versions of this practice have been in place for four years. The Fed has stated that they will “taper” or begin to remove portions of this stimulus when unemployment gets below 7% and inflation rises above 2%. So far, neither of these have occurred, yet there is concern that the Fed could take action as early as this month. Why? The latest Fed minutes suggest more criteria may have been added. The Fed appears to be concerned about leverage in the stock market (stocks being purchased using borrowed money) and increased risk-taking in the bond market (bond buyers using junk bonds to get some yield). We are not convinced one way or another whether the Fed will begin to taper this month, but we feel it would be a mistake not to do something in the direction of tapering due to the expectations built into the market.
  • The Affordable Care Act has become known to many as the Unaffordable Care Act. It is not the first time government estimates for the cost of a new program were way off the mark. Our concern goes beyond the immediate cost and looks to another name this act might be given: the “Ship Jobs Overseas Act.” Corporations don’t always respond to regulations in the manner politicians intend. We already see smaller companies cutting the work weeks of employees from full-time to 29.5 hours per week to avoid increased healthcare charges and/or fines, and we expect larger corporations to see this regulation as a renewed call to ship jobs overseas. Fewer jobs and fewer dollars earned by consumers to cover higher costs are not a very good
    foundation for growth.

Fixed Income

  • In early May, the 10-year U.S. Treasury bond had a yield of 1.62%. Today that yield is hovering around 2.90%. Along with a rise of that magnitude, the value of 10-year Treasuries has dropped 10% over the last 4 months. Keep in mind, U.S. Treasury bonds are often called “risk free assets.” Sure, the bond will mature at par 10 years from now, but that means an investor is stuck with the original purchased yield of 1.6% until that time.
  • We often claim to have a philosophy-based investment approach rather than an index-based approach. Sometimes that creates confusion when clients ask about our performance compared to an index. Without going into a lot of detail, this philosophical approach tends to protect portfolios better than an index when rates rise, and this time around is no exception.

Stock Market

  • Last month, we asked if it was time for a stock market pause, citing record highs in the market and trouble reconciling economic activity to the level of the stock market. Today we know the market elected to pause.
  • Now that the market is 3% below its high, the question is whether this is a buying opportunity or if there is more downside coming. Syria, tepid unemployment progress, rising interest rates affecting housing, government debt limit negotiations (again), and flat consumer earnings are competing with good news such as strong auto sales, firming manufacturing prices and a revised second quarter gross domestic product (GDP) growth that was
    better than expected. Caution may still be prudent.

View previous Economic Outlook newsletters.

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