02-28-2014 12:53 PM
By Matt Freund,
Chief Investment Officer, USAA Mutual Funds
After the prevailing pessimism at the end of January, with all the worries about slowing growth in China, geopolitical issues and the impact of the Federal Reserve’s taper of its economic stimulus program, the Standard & Poor’s 500 once again finds itself in record territory at the end of February.
Fed Chair Janet Yellen’s testimony Thursday on Capitol Hill provided a signal that the market wanted to hear: Policymakers are looking closely at the data to determine if bad weather is truly to blame for the recent weak reports on unemployment and other economic indicators. If it’s not the weather, she said they’re open to the idea of reconsidering the taper.
So these questions remain: Is it just the weather, or is it something else? Could it be the weather and something else?
In the final months of 2013, it appeared as if economic growth was finally reaching “escape velocity.” Then concern started to rise after the surprisingly weak jobs reports in December and January. That concern accelerated as other indicators also pointed toward ebbing growth. All eyes will be on the jobs report for February, scheduled for release on March 7, as a measure of the weather’s impact on hiring.
On the bond side, coming into the new year, the market was primed for rising interest rates and a large supply of new issuance. Instead, rates have dropped and issuance has fallen short of expectations. As a result, yield-starved investors have been snapping up supply where they can find it, which has driven up prices.
Yes, most of the country was affected by a series of wintry blasts that started in December, and this could largely explain the soft numbers. But then again, areas that didn’t have weather issues also reported a slowdown, so the answer could be more nuanced. For instance, Wal-Mart, in its earnings report last week, listed curtailed government benefit programs as one of the reasons why its sales slipped in the fourth quarter.
On Friday, the Commerce Department made a sharp cut to its U.S. GDP growth estimate for the fourth calendar quarter of 2013 — from an annualized rate of 3.2% down to 2.4%, and it could be revised down even further in March. By comparison, the third quarter’s growth rate was 4.1%, which included a sizable buildup of inventories that may have had a negative impact on the following quarter. Most of Friday’s downward revision was due to less consumer spending than originally thought.
Also Friday, pending sales of existing homes for January increased 0.1%, according to the National Association of Realtors. The results were much lower than the predicted gain of 1.8%. Part of the blame went to weather, but higher mortgage rates and depleted inventories also were cited in the explanation.
On the plus side this week, prices of existing homes nationwide saw a double-digit increase in 2013, and new home sales in January leaped by nearly 10% to their highest level in more than four years when a 3% to 4% decline had been expected. Housing is the one of the biggest components of net worth for most Americans, so rising values can create a “wealth effect” — homeowners feel a little richer and have more confidence in the future, so they’re generally willing to increase their spending, which helps the overall economy. Indeed, Friday’s release of the February consumer sentiment survey from the University of Michigan showed confidence at its highest level in six months.
We all have a lot of reasons to look forward to spring, but this year, there’s one more. Once weather is no longer a factor, perhaps there will be more clarity in the economic outlook for the rest of 2014. Equity markets could be positioned for a lift if there are clear signs of a return to gradual but steady growth, but they also could find support in a weaker growth scenario if the Fed steps in to slow down the taper.
For more on what we see ahead for investors this year, we invite you to read our 2014 investment outlook.
USAA Investments Managed Portfolio Outlook
Our view of caution toward U.S. equities remains unchanged. We remain slightly overweight in cash in our diversified managed portfolios. For investors interested in income-oriented bond investments, the USAA Intermediate-Term Bond Fund, the USAA High Income Fund and the USAA Income Fund are examples. For investors interested in tax-free income, the USAA Tax Exempt Long-Term Fund, the USAA Tax Exempt Intermediate-Term Fund and the USAA Tax Exempt Short-Term Fund are examples.
We also are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund also provides potential protection against the risks of long-term inflation.
Emerging markets represent another opportunity. Though they were hit especially hard recently, we believe that emerging markets remain attractive. They offer both an interesting long-term prospect for growth and compelling valuations. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based upon your individual goals, objectives, risk tolerance and time horizon.
This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.
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Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.
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