The BEA's second estimate of 4Q13 GDP was revised down to 2.4% growth from the 3.2% initially released. Early data this year, such as industrial production, housing starts and manufacturing surveys have prompted some downward revisions to estimates for 1Q14 GDP growth. The extent to which severe weather alone has contributed to recent weakness remains to be seen.
The Bureau of Labor Statistics released the January employment report, which showed job growth of 113,000 and an unemployment rate of 6.6% reflecting stronger household survey employment growth. Initial claims jumped a 14,000 to 348,000, although the weekly figures have been volatile over the past few months given the holiday season and severe weather.
With the 4Q13 earnings season almost complete, the S&P 500 operating earnings are estimated to be $28.50, representing 23.1% year-over-year growth.
Consumer prices increased 0.1% in January (up 1.6% year-over-year), on increasing energy, food and core prices. Core prices firmed slightly as well, rising 0.1% (up 1.6% year-over-year). Final demand producer prices increased 0.2% in January on the back of higher energy, food and core prices. Import prices increased 0.1% in January. Overall, the inflation environment remains benign.
The FOMC left rates unchanged but continued with plans to slow the purchase of longer-dated U.S. Treasuries and mortgage-backed securities another $10bn, from $40bn and $35bn per month to $35bn and $30bn starting in February. Janet Yellen gave her first semi-annual address to Congress as Chairwoman of the FOMC, surprising few with her remarks as she reiterated a well telegraphed policy stance. The minutes of the January meeting did not provide much new information, although it did reveal an internal debate about how forward guidance should evolve and when interest rates should rise.
Financial turmoil caused by ongoing European sovereign debt crisis.
Higher oil prices due to turmoil in the Middle East.
An over-easy Fed may pose a longer-term threat to bond investors.
Credit conditions for individuals and small businesses remain challenging.
Emerging market contagion could increase volatility in developed markets.
- While earnings growth has slowed, low average inflation and interest rates still make stocks look cheap in relative terms.
- Large-cap and growth stocks look cheapest.
- High-yield bonds look cheaper than Treasuries, but a diversified approach to fixed income investing seems appropriate given economic uncertainty.
- Residential real estate continues to look attractive as a long-term investment.