by Shawn Narancich, CFA
Vice President of Research
Land of the Rising Stimulus
Nervous investors inclined to book profits got several excuses to do so this week, and despite blue-chip U.S. stocks ascending to new highs early on, equities in most major markets lost ground. Across the Pacific, few would have wagered on a 23 percent increase in 2013, let alone in just the first few months, but that’s where Japanese stocks (measured by the Nikkei 225 Index) stand at this point. Behind the rush of optimism is a new prime minister and central bank chief who have taken a page out of our Fed’s unconventional playbook, vowing to do whatever is necessary to end Japan’s miserable 15-year stint of deflation. Ben Bernanke’s newly installed counterpart Haruhiko Kuroda fleshed out the central bank’s policy bone, vowing to double Japan’s monetary base by boosting the country’s quantitative easing program, to the tune of 1 percent of GDP monthly. Long-term Japanese government bonds, real estate investment trusts, and even exchange-traded funds will be purchased in a show of force roughly twice as large as the Fed’s current program, when measured relative to economic output. Reactions were predictable. The yen plummeted, Japanese stocks surged, and most of the world’s economic observers applauded. Improvement in Japan’s leading economic indicators and anecdotal evidence of better sales activity appear to confirm an intended uptick in economic activity year-to-date. However, it’s still too early to tell how successful Japan’s aggressively expansionary monetary policy will be in stimulating loan demand and, ultimately, the country’s output.
Trouble in Paradise?
Stateside, a slowdown in manufacturing activity and a much weaker-than-expected March jobs report put a chill into our stock market. After several consecutive years of the economy experiencing a summer slowdown, the question in the back of investors’ minds is whether we could be in for another air pocket of economic activity following the highly documented tax increases and mandated government spending cuts instituted earlier this year. A net jobs gain of 88,000 for March was certainly underwhelming, and while optimists will point out that the previous two months’ jobs data were upwardly revised, the fact remains that average job creation in the first quarter fell below fourth quarter 2012 levels by more than 15 percent. Colder-than-normal weather could have impacted the jobs tally, but when combined with the Purchasing Managers’ Index of manufacturing activity also retracting more than expected in March, investors are less likely to presume that an economy growing more quickly in the first quarter can sustain such 2.5 to 3.0 percent growth momentum for the rest of the year. Diminished reconstruction activity following Hurricane Sandy last fall, reduced levels of inventory investment, and fiscal headwinds are likely to cause the economy’s growth rate to normalize at a lower level for the remainder of 2013. In the meantime, resurgent housing and the wealth effect from higher asset prices are likely to remain key supports preventing a more sinister outcome.
It’s About that Time Again
Ready or not, Alcoa ushers in first quarter earnings season next week when it delivers results after the close of trading Monday. Investors aren’t expecting much from corporate America this time around, with consensus expectations calling for 3 percent growth in earnings for the S&P 500. While public companies have become masterful at managing down expectations into the print, sprinting ahead of estimates this time around may prove more difficult given a stronger dollar that created first quarter headwinds for multinational companies’ international earnings.
Our Takeaways from the Week
- Aggressive monetary policy easing in Japan has resurrected the country’s stock market
- Investors are mulling less bullish economic data domestically, as first quarter earnings season looms