Economic Notes for the Week of January 9th

In U.S. news, the Institute for Supply Management (ISM) manufacturing index showed some slight improvement, from 52.7 to 53.9—slightly better than expected.  This month, production, new orders and employment all increased, while inventories deteriorated a bit.  The ISM is at its highest level since last April, but remains below late 2010 levels.

The ISM non-manufacturing index was also slightly better than last month, at 52.6 compared to 52.0, although analysts expected better.  Much of the core data of the report of new orders and overall business activity was unchanged from the previous month.

The construction spending report was mixed as housing investment was up but non-residential building was softer—net-net, a wash.

The FOMC Minutes were released with a new wrinkle—the Fed will begin publishing Fed Funds interest rate forecasts beginning this month, along with a commentary about rate assumptions and other government balance sheet information.  Part of this is setting market participant expectations concerning open market asset purchases in the future, which could prove to be important.  Other parts of the current report were as expected:  the Fed was cautious about economic growth, a tone which was discussed in their initial press release, as well as continued resource slack potentially resulting in below-mandate inflation levels for some time to come.

We aren’t sure if this new ‘transparency’ about future interest rates will be especially helpful to investors or calming to markets.  Although former Fed Chairman Alan Greenspan wasn’t known for his crystal-clear descriptions of policy actions, the Fed of decades ago was even less transparent in terms of behind-the-scenes operations.  Before the early 1990’s, the Fed’s open market operations and target rates were largely not announced to the public in real time.  Of course, keeping a bit of ‘secrecy’ can have its advantages, while giving too much information away to fickle and short-term-focused markets can result in its own set of problems.

Factory Orders were up +1.8% in November, close to what was expected.  Shipments of ‘core’ (non-defense related) goods were revised up and inventories increased.  Overall, these numbers combined with other capex spending figures continued to look strong overall for Q4.

The ADP employment report was a bit better than expected at +325k for the month, quite a bit better than expected, but this is likely a result of seasonal adjustments/distortions (as in purged employer payroll records each December as a normal recordkeeping exercise).  Initial claims were 372k for the last week in December, which were a bit fewer than expected.

Non-Farm Payroll Employment grew from 100k to 200k, much better than expected (although much of this was due to seasonal hiring).  On more of a higher-profile headline level, the Unemployment Rate fell to 8.5% and ‘U-6’ broader measure fell from 15.6% down to 15.2%, which also bucked consensus expectations of a reversal.

Although the Holiday season tends to act as a positive contributor to temporary employment, the underlying labor market is, in fact, improving.  Not quickly, but it is a long time coming.

Every January, economists and market prognosticators begin sharing their outlooks and predictions for the coming year.  Many are similar, since many of these folks look at the same data, are educated in conventional practices and run in the same circles.  There are also, of course, the folks at either extreme who tend to always be bullish or bearish, regardless of the underlying circumstances.  We don’t mean to discount any predictions made by these folks, since they are well-thought-out and often seem reasonable given current circumstances (many of these, by the way, are of continued ‘slow growth’ and continued market volatility—a mirror of the recent past).

However, it is also important to realize how little it takes for such predictions to fail—last year, the combination of an Arab Spring, earthquake and aftermath in Japan and continued European woes did the trick in causing radical changes to sentiment, mood and outlook.  This can happen (and has happened) in both directions… as the U.S. economy has found better footing, predictions are notably more bullish than they were just a few short months ago.  No doubt 2012 will be full of any number of surprises, which cannot be planned for.  In hindsight, disciplined and patient investment approaches—not emotional reactions to just-happened events—are what prove to be most successful.


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The first week of the year gave us some promising results.  Some market strategists look at the first trading sessions each year as a bellwether for the coming year’s sentiment… whether it be the first day, the first five days, the entire January effect, etc.  It is interesting to note that, historically (at least since 1950), if the first five days of the year have been positive, there has been a 87% chance of a positive market year and a better-than-average performing year at that.  Of course, that certainly didn’t occur last year…

U.S. large-cap equities were solidly positive on the week, with improved investor sentiment.  Materials, financials and technology led the way, while defensive utilities, staples and telecom were weakest on the week.  Mid- and smaller-cap equities followed suit with gains, albeit to a lesser degree than the overall S&P.

Developed market foreign equities lagged for the week, with poor performance from Japanese, Spanish and Italian stocks.  Emerging market stocks gained, much in line with U.S. stocks, with India, Brazil and Russia (three of the four ‘BRICs’) performing strongest

U.S. bonds fell in value with rising rates and improved expectations.  As expected, ‘credit’ including convertibles and floating rate performed in line with rising rates.  Foreign debt was mixed.

Commodities gained in the ‘risk-on’ week in a variety of areas including natural gas, cotton, crude oil and precious metals, while grains lost ground.

Enjoy the week.


Karl Schroeder, RFC, CSA, CEP

Investment Advisor Representative

Schroeder Financial Services, Inc.