We are now just over a month into the first quarter of 2013. This is always a noteworthy time for the markets, in the sense that this is the time we learn how the economy really acted in the previous fourth quarter, and we see the kind of footing we have kicking off the year ahead.
Quite simply, the markets have been rockin’ and rollin’. As economist David Rosenberg put it on January 31, “Sentiment is clearly off the charts bullish.” Remember the VIX Index, or “fear gauge” that we often reference? It reads about 13 currently, and for the past year or so we’ve become very accustomed to readings hovering in the 20s, with a high of over 27.
On February 1, stocks reached five year highs. The S&P 500 Index rose to its highest level since December of 2007. Investors are keen on equities and are pushing their money there, and it is being felt by the markets.
As we have been hinting at and warning about for a while, all of this stock market rallying is happening in the midst of not great economic news. Yes, we are continuing to grow, but fourth quarter data came in to underwhelm, to say the least. Real GDP slipped -0.1% in the fourth quarter, contributed to by a significant decrease in defense spending, lower exports, and slower buildup of inventories. The quarter marked the economy’s worst performance since the second quarter of 2009. Granted, 2012’s third quarter numbers were misleading in that they were somewhat inflated by a surge in inventories, but that doesn’t account for the severity of the fourth quarter’s decline.
On a more positive note, however, personal income growth was impressive, the housing market showed steady healing, and Hurricane Sandy re-building boosted spending.
Also on our minds is the impending debt ceiling, which took over headlines in mid January when the House of Representatives, by a vote of 285-144, agreed to suspend the debt ceiling for three months. For all of us wondering what that actually means, the answer is essentially this: suspending the debt ceiling alleviates the possibility of defaulting on our debt between now and May 19. As you may have gathered, there is not much reassuring about that statement, at least on a long-term scale. There is much, much more to come regarding the debt ceiling and the US budget in general, and how they will be addressed in the next few months.
Our most solid conclusion remains that unlike us, the majority of investors are not tremendously worried about this issue, at least not for now. Just as was the case with the Fiscal Cliff (which we did technically go over for a day), investors weren’t too worried about when a deal would be reached, as long as one was reached at all, and they were seemingly confident in that.
For now, the markets are reading similarly, and this is by no means a complaint about the positive performance by the stock market, but rather an asterisk of caution due to the lack of alignment between actual economic conditions and prospects, and investor behavior.Our Perspective
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