The weather is finally starting to turn, and economic data is returning to a more trustworthy state. It’s early however and first quarter earnings season is just beginning as well. Expectations are relatively low, in large part due to the weather, but there is increased interest in forward guidance which could be the catalyst for the next move in the market. With corporate confidence improving and some fiscal concerns receding, we expect a relatively optimistic, yet cautious, tone to prevail.
On the economic front, both versions of the Institute for Supply Management’s (ISM) surveys showed improvement. The Manufacturing Index rose while new orders encouragingly increased. The Non-Manufacturing Index, representing the larger service side of our economy, showed a nice gain with the employment component having the largest gain. Auto sales appear to be rebounding from a weather induced pause, indicating that consumer demand is still decent and confidence is improving. The Leading Economic Indicators Index (LEI) rose in March, the most in four months, and above consensus estimates. Six of its ten components made positive contributions indicating widespread strength among individual indicators. This is historically consistent with above-trend economic growth. On a year-over-year basis, the LEI is up 6.1% which is well above the historical average of 2.3%, signaling continued economic momentum for the immediate future.
While the Fed is trying to strike the right balancebetween economic growth and reducing quantitative easing, investors should expect continued market volatility. Ultimately, the Fed is still concerned with elevated unemployment. By some estimates, the short-term unemployed are at levels consistent with relatively full employment. However, it is longer-term unemployment that remains elevated, and finding solutions to that problem is more difficult. The Fed’s tapering of its quantitative easing (QE) program continues, but it remains cautious and methodical in its attempt to return to normal monetary policy.
Getting caught up in the weeds is easy in this 24-hour news cycle where everyone is looking to make a splash, but successful investing requires staying above the fray and remaining disciplined to your asset allocation targets. Investors should welcome the solid economic news from the Spring Thaw. If the equities in your portfolio did well last year and you haven’t yet rebalanced, you might also consider a little “spring cleaning” to bring your allocations in line. Most importantly – get outside and enjoy the spring weather!
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