Macro View: Sound Fundamentals but Fatigue in the Markets

Global CIO Commentary by Scott Minerd

The U.S. economy continues to improve, and the housing market and construction spending in particular will make larger contributions to GDP than they have in years. Markets, though, have a tendency to occasionally fall out of line with fundamentals. In 2011, for instance, the economy was gaining strength, but a temporary pull-back in the markets put stocks off nearly 20%, and high yield and bank loan spreads exploded.

Today it appears that the rally that has been in place since the fall of 2012 is becoming frayed. From credits to stocks, there are indications of tiredness, with each advance posting less robust gains than the prior one. This does not portend a bear market, but it does appear increasingly likely that despite the favorable longer-term economic outlook, we will see some sort of correction or consolidation in the near-term.

Recovering Housing Market Fueling Construction Job Growth

Five years since the last recession started, payrolls in the U.S. private sector are still 2.9 million less than pre-recession levels. The construction sector, which usually employs only 6% of U.S. total jobs in the private sector, has lost 1.7 million jobs during the same period. With the recovery in the housing market accelerating, hiring in the construction sector is regaining momentum. Over the past three months, construction payrolls have increased by 111,000, accounting for approximately 18% of total job growth in the private sector.

U.S. CONSTRUCTION JOB GAINS AS A SHARE OF TOTAL PRIVATE SECTOR JOB GAINS

Economic Data Releases

U.S. Consumer Measures Positive

Fourth quarter GDP was revised up to 0.4% in the third revision. Consumption was revised down to 1.8%, while investment and net exports were up.
University of Michigan consumer confidence was revised sharply upward in March, contributing to four consecutive months of increases.
Personal income grew 1.1% in February, a strong rebound from January’s negative growth.
Personal spending was up 0.7% in February, the highest since September.
Initial jobless claims rose to 357,000, an increase of 16,000 since the previous week.

The ISM Manufacturing Index dropped in March by the most since July 2011, from 54.2 to 51.3.
Construction spending gained a more-than-expected 1.2% in February.
Pending home sales fell 0.4% in February, after January’s 3.8% gain.
Factory orders grew 3.0% in February, the best in five months.

Continued Malaise in Europe, China Manufacturing Picks Up

Eurozone unemployment remained at 12.0% in February, the highest on record.
The eurozone manufacturing PMI for March was revised up slightly, from 46.6 to 46.8. PMIs in France and Germany also ticked up after revision.
German retail sales rose for the second consecutive month during February.
German unemployment in March rose 13,000, while the unemployment rate remained at 6.9%.

Retail sales in Italy fell 0.5% in January, the second consecutive month of negative growth.
China’s official manufacturing PMI rose to an 11-month high of 50.9 in March.
Industrial production in Japan unexpectedly fell for the first time in three months in February.

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