After a couple of weeks of declines, markets managed to recover a bit last week, although they appear to remain mired in the same sloppy trading pattern they have been in for the last month
The economic backdrop continues to be mixed, but the overall trend continues to be one in which the US economy appears to be growing slowly. One interesting pattern that has emerged in recent months is that the US household sector has been picking up strength at the same time that the industrial side has been weakening a bit. While an improving household sector is critical to ensuring positive long-term growth, there are some caveats to this trend. First, some of the strength can be attributed to the fact that households have been dipping into their savings to boost spending, which is clearly not sustainable. Additionally, some of the higher levels of economic activity can be attributed to the unusually warm weather that we saw early in the year, meaning that some of the growth may have been "borrowed" from the second quarter.
Regarding corporate earnings, it is still early in the first-quarter reporting season, but so far the data has been quite good. At this point, just over 20% of companies have reported (representing about one-third of the US market capitalization) and around 80% of those have posted better-than-expected results. At this point, it seems clear that expectations for earnings growth declined too much earlier in the year.
Since late in 2011, all of the world's major central banks have clearly affirmed their resolve to sustain the economic recovery and keep interest rates low. The problem, however, is that central banks on their own cannot address all of the issues. In particular, many politicians and governments in Europe have been slower to act in helping to solve that region's debt crisis. While some of the lack of decisive action can be blamed on ongoing election campaigns it is nonetheless disappointing. Since last year, the European Central Bank has been quite aggressive in terms of attempting to promote liquidity, but the overall progress in that region has been slow and inconsistent.
Even a cursory look at stock market performance over the last several months shows how important global monetary and fiscal policy can be. The rally that started late last year and that persisted until about a month ago was triggered at least in part by the ECB's announcements that it would become more aggressive in terms of promoting growth and liquidity. Taking a further look back, it seems clear that the 2010 downturn in stock prices ended when the Federal Reserve announced its QE2 program and the 2011 selloff was halted by some forceful action from both the Fed and the ECB.
The world's central banks have drastically expanded their balance sheets and there is ample liquidity available. The issue is that this liquidity has been slow to move into the real economy since banks have been reluctant to lend and since private-sector credit demand has been weak. As the global economy continues to heal, however, money and credit growth is starting to improve (more so in the United States than in Europe or Japan), which is a positive sign.
Given these trends, some are wondering if the current market environment (call it what you will: a correction, a consolidation or a digestion) will require additional policy action to avoid it transitioning into something more serious. We do not believe new policy action is needed to act as a catalyst for a new leg of the bull market, but we do think we need to see a persistent commitment from all policymakers around the world to support continued economic recovery.
Thank you for your continued confidence in Martone Capital Management.
We welcome your comments and questions.
William A. Martone - President CLU, ChFC
Michael C. Martone - Registered Principal
William Martone is President and Senior Portfolio Manager of Martone Capital Management, Inc., which was founded in 1994. Bill has almost 40 years of experience in the financial services industry and manages portfolios for both individual investors and pension funds using multiple investment strategies. Bill is a Chartered Financial Consultant, Chartered Life Underwriter, and New York State Registered Investment Advisor. He is frequently quoted in the Westchester Journal Business News as well as other publications. Martone Capital Management was featured on CNNfn.