LFC Viewpoint: 2Q2014 Economic Commentary


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Lee Financial's 2Q 2014 economic review and commentary

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LFC Viewpoint: 2Q2014 Economic Commentary

  1. 1. LFCViewpoint L E E F I N A N C I A L C O R P O R A T I O N | J U N E 3 0 , 2 0 1 4 8350 N. Central Expressway, Ste. 1800, Dallas, TX 75206 | 972.960.1001 tel | 972.404.1123 fax | www.leefin.com | ©2014 Lee Financial Corporation 1 After their June meeting, the Fed’s Board of Governors provided updates regarding key economic indicators including unemployment, household spending, inflation, and more. Perhaps one of the most perplexing data points is inflation. Even after years of the Fed’s massive asset purchases (reaching points of $85 billion/month in 2013), the Fed’s inflation numbers still remain well below the expected levels despite such an inflated money supply. Recent Fed actions have demonstrated that a relaxed monetary policy is not the only factor in the economy that affects inflation. Increasing capacity utilization in capital, labor, and housing markets also play a role in adding inflationary pressures as the economy grows. As these improve, we expect to see inflation rise. Interest rates are likely to remain low for the foreseeable future as inflation remains below the Fed’s long-term objective. The Fed has tapered its bond-buying program by reducing their purchases to $35 billion/month – less than half of the 2013 levels. Low mortgage rates have kept home affordability at historically attractive levels; however with rates on the rise since the spring of 2013, growth in this area has been somewhat disappointing, and many are quick to blame the harsh winter for business investment and house construction woes. The improved weather conditions through the second quarter may be a contributing factor for rising levels of business and consumer spending. Consumer confidence is a vital sign for economic conditions, and we hope to see spending habits continue their recent trends during the third quarter. Unemployment levels remain elevated around 6.1%, which is still higher than the Fed’s ideal rate of 5.2% - 5.5%. The labor force participation rate — i.e. the proportion of the working age population that can work that actually is working — has appeared to stabilize in recent quarters. The Fed recently expressed that a “highly accommodative stance of monetary policy remains appropriate.”1 If the economy gains traction with increased household spending, an improving housing sector, increased hiring, and higher capital expenditures, we may see increased levels of inflation that could encourage the Fed to continue to withdraw their easy policies (i.e. Quantitative Easing) even further. Over- all, continued growth for the U.S. in 2014 looks promising. MACRO OVERVIEW 1 Source: Federal Reserve Board Press Release June 18, 2014
  2. 2. 8350 N. Central Expressway, Ste. 1800, Dallas, TX 75206 | 972.960.1001 tel | 972.404.1123 fax | www.leefin.com | ©2014 Lee Financial Corporation 2 EconomicUpdate In the last half of the quarter, equity markets have delivered positive performance with U.S. stock markets (as measured by the S&P 5002 ) up 5.2% with total returns for the year up 7.1%. International markets performed similarly with developed stock markets (as measured by the MSCI EAFE3 ) finishing the quarter up 4.3%, and developing stock markets (as measured by the MSCI EM4 ) up 6.7%. Interest rates continued to remain lower than the levels achieved in December 2013, hovering between approximately 2.4% and 2.7% for the 10-year Treasury; broad-based bond markets5 were up 2.0% for the second quarter of 2014. 2 Source: Bloomberg. As measured by the S&P 500 Index (Ticker: SPX). 3 Source: Bloomberg. As measured by the MSCI EAFE Index (Ticker: MXEA). 4 Source: Bloomberg. As measured by the MSCI EM (Emerging Markets) (Ticker: MXEF). 5 Source: Bloomberg. As measured by the iShares Core Total US Bond Market (Ticker: AGG). 2nd QUARTER RECAP 2014 OUTLOOK AND POSITIONING
  3. 3. 8350 N. Central Expressway, Ste. 1800, Dallas, TX 75206 | 972.960.1001 tel | 972.404.1123 fax | www.leefin.com | ©2014 Lee Financial Corporation 3 Although innovation is now a global phenome- non, nowhere is the innova- tion environment more dy- namic than in the U.S. With growth rebounding around the world, U.S. companies are well positioned to benefit from this innovation and favorable access to cheap energy. The chart to the right demonstrates the percentage of Gross Domestic Product (GDP) that the largest econo- mies spend on research and development (R&D). The U.S. is among the top coun- tries for R&D when measured both as a percent of GDP spent and also in absolute terms at over $450 billion/ year — factors which contrib- ute to a strong competitive advantage for the U.S. A FOCUS ON INNOVATION While the first quarter's Gross Domestic Product (GDP) reading was disappointing — revised down to an annualized decline of 2.9% — we feel the slowdown is more of a short-term soft patch than a structural, long-term concern. We continue to focus on domestic-oriented stock strategies that may benefit from a combination of a recovering consumer, improving labor market, and stabilizing business conditions. Consumers have spent the last six years repairing their personal balance sheets, and most are finally in a financial position to increase capital spending and consumption patterns. Combining the improved consumer out- look with strong corporate balance sheets may create a stable environment for domestic-oriented companies in the later part of 2014 and into 2015. Other important trends that could translate to higher domestic growth are technological advancements in the manufacturing segment (robotics anyone?), energy transformations, and improving exports. As such, we are hopeful that much of the decline in the first quarter of 2014 is temporary in nature, and that economic growth readings will be stable in the second quarter through the end of the year. DOMESTIC OUTLOOK Source: Battelle, R&D Magazine, International Monetary Fund, World Bank, CIA Fact Book, OECD
  4. 4. 8350 N. Central Expressway, Ste. 1800, Dallas, TX 75206 | 972.960.1001 tel | 972.404.1123 fax | www.leefin.com | ©2014 Lee Financial Corporation 4 The United States’ crude oil production is approaching 9.6 million barrels/day — levels not attained since the early 1970s. Not only is crude oil production increasing, but so is natural gas production. Thanks to improved efficiencies in technology, production has improved dramatically thereby reducing the United States’ dependence on foreign oil. However, this surge in crude oil production is expected to level off by 2016.6 Improvements in natural gas and renewable energy may reduce the use of coal as an energy source over the long-term. Currently, most energy is consumed by industries and transportation while resi- dential and commercial sectors con- sume the least. With vehicle efficiency improving, the energy demand for transportation should decline gradually over the next several decades. Overall, as the domestic economy grows due to improvements in the labor market, in- creases in productivity, and heightened capital investment activity, greater up- ward pressures could be placed on energy prices. However, no shocks to the energy sector are expected in the foreseeable future. DOMESTIC ENERGY OUTLOOK China continues to search for the balance between the often contradictory objectives of the short-term versus long-term growth of their economy. In an effort to improve their long-term growth prospects, China — under the direction of Xi Jinping – has continued to crack down on their economy's reliance on the shadow banking system while building a more highly regulated banking sector. Furthermore, the transition to a more consumer- oriented economy is underway. Chinese leaders have demonstrated a plan to relax their growth objectives (from the rigid 7.5% goals of recent years at almost any cost) in order to create a more sustainable and healthy China in the long-term. Despite emerging markets generally having more favorable demographic trends than their developed world counterparts, we continue to remain cautious about most economies in the developing world outside of Asia. Particularly as China transitions away from a reliance on growth-despite-all-factors, the economies that have helped fuel China’s growth engine are likely to struggle. Striking the balance between the favorable growth factors of these economies — absent an investment-driven boom in China — is key. Europe has improved in recent years given that current valuation metrics continue to be relatively more attractive than in the United States. Upcoming bank stress-testing by the European Central Bank (ECB) by means of both the Asset Quality Review and Targeted Long Term Refinancing Operations (TLTROs) may hopefully shed light on the current status of Europe’s financial system. INTERNATIONAL OUTLOOK 6 Source: U.S. Energy Information Administration - AEO 2014 Early Release Overview
  5. 5. 8350 N. Central Expressway, Ste. 1800, Dallas, TX 75206 | 972.960.1001 tel | 972.404.1123 fax | www.leefin.com | ©2014 Lee Financial Corporation 5 Disclaimer The information provided herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. It has been prepared without regard to the circumstances and objectives of those who received it. Re- search prepared by Lee Financial personnel is based on public information. Lee Financial makes every effort to use reliable comprehensive information but we do not represent that it is accurate or complete. All information, views, opinions and estimates are subject to change or correction without notice. Any use of estimates contains forward-looking opinions by the Investment Analyst which may differ from the views of Lee Financial. All estimates are based on assump- tions that may not be realized and actual results can be meaningfully different. Actual events in the markets, company or stock may cause adjustments in expectations from those currently expressed within. All securities are subject to actual known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those projected, including potential of significant losses. These forward-looking statements speak only as of the date of the communication, and do not include transaction fees. Prices, values, interest rates, indicated are based on best current information at the close of the date indicated, and will change. Nothing contained herein constitutes financial, legal, tax, or other advice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives, and a client’s portfolio may not match those allocations noted herein due to individual investor circumstances. These opinions may not fit to your financial status, risk and return preferences. Investment recommendations may change and readers are urged to check with their investment advisors before making any invest- ment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns.