Sometimes good news is greeted poorly by the market.
Last week the number of claims for jobless benefits dropped to the lowest level since October 2007. Consumer confidence also moved near a five-year high. However, the stock market dropped, and the yield on the benchmark 10-year Treasury note, which moves inversely to prices, climbed. Concerns that the Federal Reserve will taper asset purchases beginning as early as September have stoked a selling spree.
This week we look at evidence of economic rebound by first reviewing an article from the Dallas Fed, then an article from The Economist on the same theme, and finally, a thoughtful essay on the role of confidence in economic matters.
A Time for Cautious Optimism. Improvement in several economic factors suggests that the economy is poised for above-trend growth in the second half of the year. “Unemployment should continue falling steadily, and inflation remains low but shows signs of returning to normal. Housing markets appear to be picking up and sustaining a relatively healthy recovery. Home prices rose strongly in the past year, and permits and starts trended upward. Strong equity markets contributed largely to output growth, and the appetite for risk is normalizing following the recession. To date, the recovery has been slow relative to previous economic cycles, and various challenges remain, but downside risks to growth appear low.”
A rickety rebound. “The Global economy is gaining momentum. But only in America is the acceleration likely to last…After a painful adjustment, the housing recovery is built on solid foundations. Consumer debt has plunged. Banks are keen to lend. Add in the supply-side boost from shale gas, and you have the makings of a strong recovery…elsewhere the good news looks thinner…which leaves the United States as the likely engine of global growth.”
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The Role of Confidence. One memo to investors I always look forward to is that of Howard Marks of Oaktree Capital Management. His latest focuses on the role of confidence in economic matters. “Confidence leads to spending; spending strengthens the economy; the economic strength buttresses confidence. It’s a circular, self-fulfilling prophesy…the confidence that underlies economic gains and price increases.” But confidence has an impact only as long as it exists. Today, in the U.S., confidence is “halting and unsteady”…“two steps forward, one step back….I think it’s fair to say one of the key swings of the investment pendulum is between too much confidence and too little…If the economy continues to recover and the Fed’s bond buying eases off, interest rates are likely to go further on the upside. But given the modest level of confidence at play, the markets should not turn out to be perilous. Most assets are neither dangerously elevated…not compellingly cheap….Today it seems the best we can do is invest prudently in the coming months, avoiding aggressiveness and remembering to apply caution.”
And in case you missed it, click here to read last week’s blog post on the financial impacts of long-term healthcare and how you can plan ahead.
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J. Mark Nickell & Co.
Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security. J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.