Economic comments, week ending Dec. 30

By John W. Davidson | Jan 02, 2011

In the final weeks of the year, most releases confirmed the global recovery. Even U.S. housing and employment enjoyed some kernels of good news. Equity and bond markets were mixed in the final weeks of the year; but, for the quarter, equity markets produced solid positive results while government bond markets weakened (see fourth quarter and 2010 details in the tables below).

Over the last two weeks of the year, oil prices rose $3 to close the year just over $91/barrel; gold rose over $45 to close at $1421/oz.'s 30-year mortgage rates closed the year little changed at 5.02 percent. Corporate bond spreads were tighter since our last report.



The data has confirmed that the global economy is in recovery.  In the U.S., employment and housing has lagged, but even the National Bureau of Economic Research has pronounced that the Great Recession has ended and we are in recovery.  Yet, for many, it does not yet feel like recovery.  Most get the data.  The stock markets have recovered to near their pre-Lehman (2007) levels.  Corporate earnings and balance sheets are strong, both on Wall Street and Main Street.  There is even scant data showing some improvement in housing and employment (see below).  Yet our emotions have yet to confirm the data of recovery.

This holiday, our family experienced the difference between data and emotions.  Our son is in his third year at Divinity School and is the field education Intern at the historic Old South Church in Boston (Old South Church). We have heard him preach before.  We understood the data.  Yet, on Christmas Eve when he climbed into the pulpit of the magnificent Old South Church to do his part, tears filled his family's eyes.  The emotions had caught up with the data.  This emotional catch-up has yet to happen with respect to the economic recovery.

Economic Releases

Two small bits of recovery in housing and employment were released this week. The first was the number of people filing for Initial Jobless Claims dropped below 400,000 for the first time since the middle of 2008, taking down the four week average (blue) to 414,000 for the week of Dec. 24. Similarly, Continuing Claims (red) dropped to 4.128 million as of the previous week (reported on a 1 week lag). Some attribute the drop in claims last week to the snow storm, which may have prevented some from filing. While the impact of the storm is uncertain, the decline in the number of people filing Initial Jobless Claims over the last six months is significant.

The second piece of data is the improvement in the Sales of Existing Homes (red), which have rebounded to 4.68 million in November as shown in the chart below. Sales of New Homes (blue) remained near its low at 290,000. Earlier this year tax incentives generated spikes in Existing Home Sales which may have taken away from second half Sales, but the trend of the past few months has been positive.


Source: Bloomberg LP
Other Economic Releases

In the US, third quarter GDP came in at 2.6% with Personal Consumption generating 2.4%. Both numbers were short of expectations.  November Durable Goods fell -1.3%, but ex-transportation orders actually rose 2.4%.  November Personal Income and Spending rose +0.3% and +0.4% respectively.  The University of Michigan Confidence Indicator rose three ticks to 74.5 in December while the Conference Board's Indicator fell two points to 52.5.  The Chicago Purchasing Managers' index rose to 68.6, suggesting that we may get good numbers from the US PMI's released next week.

France's 3rd quarter GDP increased +0.3% over the previous quarter, unlike the U.S. numbers that are reported as a change from four quarters prior.  French Consumer Spending rose +2.8% in November.  Germany's CPI rose 1.0% in December, 1.7% year-over-year.  The UK's 3rd quarter GDP rose +0.7% QOQ and 2.7% YOY.

China's PMI for Manufacturing dropped over a point to 53.9 in December.


Equities Markets

Equity markets were mixed in the final week of the year, but most markets generated high single digit and low double digit returns for the quarter. The North American Markets produced low double digit returns for the year while Calendar 2010 returns in Europe and Asia were mixed. Note that these returns are principal only and do not include the positive impact of dividends. Bloomberg reported that the 86% return of the S&P 500 since March of 2009 is the biggest rally in a comparable period since 1955. Even though equity markets have risen at high double digit rates since March 2009, the forward looking Price/Earnings ratios do not reflect irrational exuberance; current stock prices are not in bubble territory.

Bond Markets

Bond markets rallied in the final week of the year, but most Government Bond markets generated negative returns for the quarter, but positive returns for the year.


The U.S. dollar rallied against the Looney and the European currencies in the last week of the year.  For the quarter, the dollar gained against the Yen, Pound, and Euro, but lost value to the Canadian Dollar.  For the year, the dollar gained against the European Currencies, but lost value against the Yen and Looney.  On the year, the Yen was the best performing of the currencies and the U.S. dollar gained the most against the Euro since 2005.  The Looney rose to its highest level since 2008 on the back of strong commodity price gains.

Economic Sectors

The interest-sensitive REIT sector did the best in the final week of the year, but Energy was the best performing for the quarter and Consumer Durables were the best performer for the year, even though that sector was the worst performing in the final week of the year.  Utilities were the weakest in the quarter and for the year.  Large Cap Value was the best performing in the final week, but the worst performing in the quarter and year of the capitalization sectors.  Similarly, Small Cap Growth was the worst performing in the final week of the year, but the best performing in the quarter and year.

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