Headwinds Give Way to Bullishness

With the partial government shutdown and Washington gridlock behind us for now, interest rates should continue declining and conditions are pointing to a period of renewed strength across asset classes.

October 17, 2013   |    By Scott Minerd

Global CIO Commentary by Scott Minerd

Although the just-ended government shutdown will be a drag on fourth quarter economic growth, the underlying U.S. economy still has a great deal of torque and the outlook for investments is improving. Historically, in the month following government shutdowns interest rates decline by an average of 39 basis points. It is becoming clear that the three-week government shutdown has damaged the economy, at least in the short-term. For these reasons and the likelihood that the U.S. Federal Reserve will not taper its asset purchases until next year, we see the yield on the 10-year U.S. Treasury note declining to a level below 2.5 percent. Despite the near-term economic softness, we expect a reacceleration of growth at some point in the first half of 2014. Equity markets anticipate events about six months in advance, which means now could be a favorable time to consider increasing allocations to stocks. The first game of the World Series – hopefully the Los Angeles Dodgers against the Boston Red Sox this year – is normally a solid entry point for equities. Against this backdrop, the international investment picture is also improving, and we could be entering a period of substantial improvement for risk assets across the globe. In addition to turning more bullish on U.S. stocks, I remain bullish on emerging markets, and I am still heavily bullish on European equities, which remain more than a third lower than their 2007 highs. I am also bullish on fixed-income – corporate rather than sovereign debt – and believe credit spreads have further room to tighten. The current environment looks favorable for risk assets into the second quarter of next year.

Improving Euro Zone Macroeconomic Expectations Point to Earnings Recovery

 

The ZEW euro zone macroeconomic expectation index rose to a 4-year high of 59.1 in October, indicating a majority of financial analysts and institutional investors are now optimistic about the euro zone economy over the next 6 months. This survey has historically been a leading indicator for euro zone corporate earnings and given the strong economic outlook in the region, we expect a sustained recovery in corporate earnings, creating a tailwind for European equities

EURO ZONE ZEW MACROECONOMIC EXPECTATIONS VS. EURO STOXX 600 INDEX EBITDA* GROWTH

CUMULATIVE NYSE ADVANCE/DECLINE LINE AND THE DOW JONES INDUSTRIAL AVERAGE

Source: Bloomberg, Haver Analytics, Guggenheim Investments. Data as of 10/17/2013. *Note: EBITDA refers to Earnings Before Interest, Taxes, Depreciation, and Amortization.

Economic Data Releases

Fiscal Uncertainty Weighing on Business and Consumer Confidence

Good Signs out of Europe, Export Drop and Price Pressure in China

 
Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.


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