CIO Natalie Trunow comments on September Markets
Global Equity Markets Rebound , but Economic Recovery Remains Slow
By Natalie Trunow, Chief Investment Officer, Equities, Calvert Asset Management Company, Inc.
Equities rebounded globally largely in response to more economic data showing that the U.S. economy is in fact recovering, however slowly. During September, the Standard & Poor’s 500 Index gained 8.9%, while the Russell 1000, Russell 2000, and MSCI EAFE and MSCI Emerging Markets indices added 9.2%, 12.5%, 9.8% and 11.1%, respectively.
From a sector standpoint, Information Technology was the biggest winner for the month, advancing 12.1% in the S&P 500 Index. Consumer Discretionary and Industrials also were up significantly, returning over 11%. The laggards for the month were Utilities, Consumer Staples, and Financials, advancing just 3%, 6% and 6%, respectively, for the month.
Mixed Economic Picture
The slow economic recovery is a result of several conflicting trends. The equity markets are rebounding, recent jobless claims are improving, and the probability of a double-dip recession seems more remote. At the same time, consumer confidence, the housing market, and the overall employment picture are still shaky. Private businesses, especially in the manufacturing sector, are cautiously increasing hiring although not enough to bring the current run of 26-year highs in the unemployment rate down. The unemployment rate actually rose to 9.6% in August as more discouraged workers re-entered the workforce. The under-employment rate also increased during August to 16.7% from July’s 16.5%, although long-term unemployment fell.
Despite low consumer confidence levels, consumer spending is showing signs of improvement. U.S. retail sales improved in July and August by 0.3% and 0.4%, respectively. Except for Autos, spending data were better than anticipated, possibly supported by the recent extension of emergency unemployment benefits.
Housing Market Still a Drag on Economy
The double-dip in the housing market has arrived and depressed home prices may be here to stay in the short-term. Home prices moved lower during the month and shrinking home equity levels continue to weigh on consumer confidence. Although default and foreclosure rates fell in July, too many homes are still in foreclosure or in default and offered at depressed prices. Despite historically low mortgage rates, sales of new and existing homes fell to the lowest levels on record in July, as buyers wait for better deals with supply still exceeding demand. In the long run, if prices accelerate at a 3% annual rate, it will take about 10 years to reach the previous peak for housing prices.
This fall in home prices has contributed to a fear of deflation. Recent data, however, shows that gasoline and food prices have seen increases, helping keep inflation numbers positive, albeit low, and away from deflationary territory.
Manufacturing Sector Continues to Show Strength
August data that became available in September showed that growth in the manufacturing sector continues to be robust and better than forecast, although the service-sector expansion is still lagging. If the economy continues on this slow, gradual path to recovery, the Fed may not have to keep its easing policy stance for too long. The unexpected increase (the most in two years) in U.S. wholesale inventories seems to indicate that U.S. companies are willing to accumulate additional inventories in response to stronger demand.
Administration Takes Steps to Encourage Economic Growth
The Obama Administration continues to look for ways to stimulate the economy and improve the employment picture. $180 billion in business tax breaks and infrastructure investment is being proposed to boost spending and job growth. These long-term investments can produce positive long-term effects in the economy in the years to come. At the end of the month, President Obama signed into law a $30 billion small business lending bill which sets up a lending fund for small businesses and includes an additional $12 billion in tax breaks for small companies. While this should help stimulate employment in the long run, budget deficit levels are at unprecedented highs and will need to be addressed soon.
During the month, the U.S. became increasingly vocal against China’s unwillingness to let its currency appreciate. Some fear that if political rhetoric becomes too heated, China may retaliate by purchasing fewer U.S. Treasuries. If this scenario unfolds, there will likely be less support for Treasury prices at existing levels. At the moment, however, it seems unlikely that the political rhetoric will lead to an outright trade war.
Japan’s growth slowed less than originally expected, indicating a more positive global economic growth picture.
From an asset class standpoint, we continue to be optimistic about the equity markets and believe that, barring major geopolitical calamities, there is an attractive return opportunity in equities over the next 6-18 months—both in absolute terms and relative to Treasuries and other areas of the fixed income market.
This commentary represents the opinions of its author as of 9/30/10 and may change based on market and other conditions. The author’s opinions are not intended to forecast future events, guarantee future results, or serve as investment advice.
The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Asset Management Company, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
Calvert Asset Management Company, Inc., 4550 Montgomery Avenue, Suite 1000N, Bethesda, MD 20814