What I’ve Been Reading — Economic Commentary for March

Below is a list of reading which may shed some light on topics which have been moving the market. As can be expected, these articles cover the Fed, China, and incoming economic data. Some believe the market volatility over the past few weeks is primarily the result of tensions taking place in Russia, but I feel that its more of a normal reaction to a strong 2013 for stocks.

Fear of Rising Rates Killing Bull Overblown?
This article from the USA Today has a nice summary of the historical evidence on how stocks perform during periods of rising interest rates, a concern which again came to the forefront of investors’ minds following last week’s U.S. Federal Reserve meeting. As detailed in the article, stocks have performed fairly well on average when interest rates are rising but still low. As this condition is typically associated with an improving economy, cyclical sectors have tended to perform best on average. As noted in the article, once interest rates hit a high nominal level stocks have tended to struggle. We have also found that when the pace of the rise in interest rates is very sharp it has also tended to provide a headwind for stocks. Nonetheless, the article provides a good historical perspective that suggests stocks can perform well during a period of moderately increasing interest rates.

China’s Urbanization Loses Momentum as Growth Slows
More than 300 million Chinese have migrated into cities from rural areas since 1995, helping fuel stronger economic growth. However, the pace of urbanization is projected to slow by nearly a third over the next decade according to a Chinese government report. A sizeable slowdown in urbanization would have a material impact on China’s rate of economic growth. According to Nomura Holdings, slower urbanization could reduce China’s GDP growth by half a percent annually over the next five years. More than 730 million Chinese currently live in urban areas, but the growth of urbanization is likely to slow because of a shrinking pool of rural residents, rising air pollution in urban centers and unaffordable housing.

Pace of Home Price Gains Slow According to the S&P/Case-Shiller Home Price Indices
Today’s release of the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that the 10-city and 20-city composites rose 13.5% and 13.2%, respectively year-over-year through January. The broader 20-city composite posted its third consecutive monthly decline of 0.1%, with 12 cities seeing their annual rates worsen. As of January 2014, average home prices across the United States are now back to their mid-2004 levels. Separately, purchases of new homes in the U.S. fell in February to the lowest level in five months. Unusually frigid temperatures along with rising mortgage rates, higher property values and a lack of supply have dampened prospective buyer demand.

Gas Boom Rejuvenates Manufacturing
This article from The Wall Street Journal highlights the resurrection of U.S. manufacturing that is occurring due to the shale gas drilling boom. In a dramatic about-face, petrochemical companies have returned to the U.S. and are making multibillion-dollar investments to profit from the abundant cheap natural gas pouring out of shale-rock formations across the country. From 2010 to 2012, energy-intensive manufacturing sectors added more than 196,000 U.S. jobs and increased real sales by $124 billion in the nation’s metro areas, according to the report. Steel plants across Indiana’s Rust Belt and from Birmingham, Ala., to Knoxville, Tenn., to West Mifflin, Penn., have more orders for metal. And machinery-sector growth exploded between 2010 and 2012, with Houston leading the way, followed by Chicago, Detroit, Los Angeles and Milwaukee, the report said. “That means jobs,” said Lansing, Mich., Mayor Virg Bernero. “There are still people who need jobs, and advanced manufacturing is the ticket.”
As always, feel free to e-mail me with any questions or concerns.

Russell Bailyn

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Author: Navigating the Financial Blogosphere

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