First quarter GDP was + 2.5 % with an unemployment rate of 7.6% and the lowest labor participation rate of 63.3 % since 1979. At that time we had double digit inflation and Jimmy Carter as President.
On the earnings front, 57% of reporting companies have posted lower than expected revenues but 70% have exceeded consensus earnings estimates. Managements are keeping costs down and margins up in this slow growth economy while facing the headwinds of strengthening dollar. In some spots earnings are beginning to sputter, with misses by CAT, GE, IBM and MMM .Despite these negatives the S&P has had the highest quarterly earnings ever of $26.44 annualizing at $105.76 for a 15 times forward P/E ratio.
Ten year US treasury yields closed at 1.67 % while German Bunds yield 1.22%. Spanish sovereign debt for 10 years now pays 4.14 %. Euro austerity measures and deleveraging on the continent have caused 27% unemployment in Spain and 12.1 % across the Euro zone.
Gold saw a 13.6 % drop in 2 days during the month or the biggest drop in 30 years .We seem to have abandoned the fear of hyper inflation? What happened to too much money chasing too few goods? We are witnessing easy money finding its way into financial assets rather than the real economy.
Japan has begun a massive asset buying binge that has rallied their long dormant stock market. They aim to jump start their economy and rescue an increasingly less competitive manufacturing base. As Japanese stocks soar the Yen plunges to multi year lows versus the dollar and Euro.
Europe ,China , Russia and the developing countries all feel pressure to stay competitive and will likely lower interest rates sooner rather than later. Austerity policies will shortly come to an end in the Euro zone as German elections near and unrest in the streets will likely create a need to stimulate GDP and job growth rather than curb deficits.
As we begin the "worst six months of the year" for stock market returns with the S&P 500 index at new all time highs one wonders if this rotation into high yielding equities can continue. History argues for a pause in this rally as the past 3 years saw declines beginning in May.
So far in 2013 U.S. stocks have outperformed non U.S. stocks as well as bonds and commodities. Can we continue this uptrend is the big question?
While bonds are unlikely to appreciate much from here without a global recession both domestic and non US equities are likely to benefit from easy monetary measures and Europe takes a holiday from austerity.
Gather Ye Rosebuds while Ye May!
Douglas Coppola
April 30, 2013
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