MARKET AND ECONOMIC OUTLOOK
"The trouble with quotes on the internet is that it's difficult to determine whether or not they are genuine." - Abraham Lincoln
Although difficult to measure the complete impact of the sequester cuts on the economy, some fallout has been observed to date. Air traffic delays started to occur due to the federal furlough of air traffic controllers. In response to the service disruption, Congress worked some mojo and passed a bill to address the delays. Specifically, the legislation allows the Federal Aviation Administration (FAA) more budget flexibility in personnel cutbacks. Although the temporary solution was applauded, the quick fix was simply a band aid on a wound that will continue to get worse unless treated. Additional snafu's can be expected to surface in the near term.
More than half of the companies listed on the S&P 500 index have reported earnings thus far. For the most part, earnings which have been revised lower are exceeding expectations. But, the actual sales numbers and the number of revenue "beats" have been disappointing. Weak economic demand overseas, particularly out of Europe, and a stronger dollar are partly to blame. Undoubtedly, the spending cuts and tax changes have had some negative impact here.
The budget reductions are starting to impinge on economic data, which has been more sluggish in nature. The March employment report was disappointing, with piddly job growth in evidence and the smallest increase since June 2012. The April private jobs data followed with soft growth. Expectations are for the April job market report to follow suit. A bright spot was the consumer confidence reading, which bested guidance. It is too early to conclude, however, if confidence is truly on the mend.
The Federal Reserve (FED) did not reveal any changes to the $85 billion per month bond buying program and rates remain unchanged. Officials noted that the amount purchased could be increased or decreased depending on employment and inflationary conditions. The low inflationary environment is expected to continue. The carefully watched Consumer Price Index (CPI) data points to an inflation rate below the Fed's 2% target. The FED did acknowledge some "downside risks" to the economic outlook The statement comes on the heels of a lower than expected first quarter 2013 Gross Domestic Product (GDP) estimate of 2.5% (vs. the 3.2%).
The day following the FED meeting, the European Central Bank (ECB) lowered its key rate by 25 basis points to .5%, as expected. There is hope that measures will be discussed to address the worsening unemployment in the region. According to Eurostat, unemployment in the Euro-zone reached a high in March of 12.1%, with rates particularly elevated in Italy (11.5%) and Spain (26.7%). Although inflation remains in check, the economy in the area is still contracting. The ECB did leave the door open for additional easing in the future.
The Boston Marathon Bombings and ricin laced letters sent to government officials this month were somber reminders that the threat of terrorist activity on domestic soil remains real. Some relief was provided with the swift arrest of suspects. These unforeseen tragic events are the epitome of uncertainty that can rock the market at a moments notice.
The S&P 500 and Dow Jones Industrial Average wasted no time jumping to new highs at the beginning of April. But by mid-month the momentum had started to give way, with the major indices now locked in a trading range. There are a plethora of reasons why this could be happening. Boston bombings, spending cuts, weaker economic data, earnings reports, global economic concerns or merely the market needed to take a breather before resuming the upward path. Seasoned technicians cried "contra indicator" when the Barron's cover page flashed "Dow 16,000", depicting a grinning bull on his pogo stick jumping over a deflated bear. This type of excessive bullish sentiment in the past has indicated the market may be ready to correct in the short term. Be that as it may, there is little evidence to suggest that the major indices are topping out longer term.
Deborah Mitchell, CFA, MSW