As we close out another week of March, I am reminded that we just passed the six year anniversary of the worst market decline since the great depression; a time that was marked by extreme fear and volatility. While fear of crisis has dissipated, volatility has once again picked up, having become a consistent theme within the global markets as of late.
Since the financial crisis of 2008/09 the analysis of global correlations and economic data has spawned a new economic indicator that is providing us with a good explanation of what we are seeing throughout the global markets. This global Purchasing Managers’ Index (PMI) is an indicator of economic health within a country’s manufacturing sector and provides us with some context as to why we are seeing strength in certain markets and weakness in others. What we found to be of most interest was that the top 5 countries showing the strongest growth are all from Europe.
Another takeaway for us from this indicator is that countries that did not ignore the need for structural reform and got their houses in order, so to speak, such as Ireland and Spain, have seen a nice resurgence of manufacturing and economic growth. Others who have kicked the can down the road, such as Greece, continue to be mired in a stagnant economy. We find it no coincidence that the capital markets of Germany, the U.K. and other northern European countries that have been moving higher are also the same countries with a higher Global PMI reading.
Elsewhere in Europe we are seeing the economic sentiment index rise and the European Central Bank recently initiated Quantitative Easing policy begin to unclog their credit markets. As many of our readers know, we have been talking quite a bit recently about the building opportunities we see from the Eurozone, the most recently released Global Purchasing managers’ index provides us with confirmation with respect to our view towards Europe. Thus we would continue to recommend that investors increasingly look across the pond within their portfolios to balance their risk and return profile.
Regarding North American markets this week, we saw the US Federal Reserve have the greatest impact, with an extra dose of dovishness delivered by Chair Janet Yellen. It is quite incredible the impact that a single word can have, but with the Federal Reserve removing the word “patient” from their statement and a broad downgrade in growth and inflation, we saw an immediate positive move in equity markets as the likelihood of a June interest rate hike has been substantially reduced.
This market reaction to the change in wording seems to reflect what our US Strategist, Tony Dwyer, has been reporting in several of his client notes recently that as the Federal Reserve focuses on headline PCE to gauge inflationary pressures, the start of any interest rate hikes should be in the latter part of this year and possible even early next year. We will continue to suggest that investors modestly reduce their ownership of interest rate sensitive such as Utilities and REITs over the course of the next quarter as we prepare for a change in interest rates.
Next week we will comment on what we feel is the beginning of stability within commodity prices and the impact and opportunities that arise from that for longer term, non-income focused investors.
For sports pool fans, this week marks the beginning of what some consider the most exciting tournament to watch, the NCAA college basketball national championship tournament. 64 teams all competing in a single knockout format makes for some great matchups and upsets. I know that my pool has already taken some critical body blows, from which I am unlikely to recover. But you never know who will pull off the next great upset. Enjoy March Madness!
We thank you for your continued trust and as always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group