Last Friday, the S&P 500 closed above 1,500 for the first time since 2007, and the Dow is closing in on 14,000. The S&P also scored its longest winning streak of consecutive positive days (eight) since 2004. According to Lipper, the flow of funds into the stock market in the first three weeks of January is the best in 12 years. However, the market's breadth is starting to narrow. As we move deeper into earnings season, I expect we'll see more of a stock-picker's market, a case of "every stock for itself."
Stat of the Week: Leading Indicators are Up 2.6% (Annual Rate)
The U.S. economic news continued in a very positive vein last week. On Thursday, the Conference Board reported that the December Leading Economic Indicators "LEI" rose 0.5%, the strongest monthly rise since last September. In the second half of 2012, the LEI rose 1.3% (a 2.6% annual rate), much faster than the 0.5% rise (1.0% annual rate) in the first half. Overall, this resurgence in the LEI is encouraging.
A second positive economic report was released on Thursday. The Labor Department reported that new jobless claims declined in the latest week by 5,000 to 330,000, the lowest rate in the past five years. Also, the closely-watched four week average of new claims fell 8,250 to 351,750, the lowest level since March 2008. Hopefully, this improving job market will be reflected in next Friday's payroll report.
On Friday, November's new home sales were revised up to 398,000 (from 377,000), but new home sales fell to 369,000 in December. Even so, December's total was 8.8% better than December 2011. Inventories of new homes were equivalent to 4.9 months' supply, well below the 2009 peak of 12.2 months' supply. Median prices were up 13.9%, year-over-year, a welcome sign of a strong recovery in the housing market.
IMF sees Global Growth rising to 3.4% in 2013 and 4.1% in 2014
The International Monetary Fund "IMF" lowered its 2013 growth forecast for some specific countries, but the notoriously grumpy economists at the IMF still see the global economy growing by 3.4% in 2013, slightly better than 2012's anticipated 3.2% growth. For 2014, the IMF is expecting faster (4.1%) growth.
China, plus the rest of Asia and Latin America, will remain the primary drivers of global GDP growth in 2013. Last week, HSBC reported that its preliminary Purchasing Managers Index "PMI" for China's economy rose to 51.9 in January - its highest level in two years - up from 51.5 in December. The HSBC report also showed that China's exports and imports continue to steadily rise as we enter the New Year.
On the currency front, a war seems to be breaking out between major central banks over the extent of their quantitative easing (QE) plans. The latest example is the currency war between a weak U.S. dollar and an even weaker Japanese yen. All of a sudden, the euro is the healthiest major currency, reaching an 11-month high to the dollar. To keep their economies competitive in 2013, the world's major central banks - the European Central Bank (ECB), Bank of England "BOE", Bank of Japan (BOJ), and the U.S. Federal Reserve - all seem to be waging a "war" of expansive central bank quantitative easing plans.
The Fed Quadruples its Balance Sheet with U.S. Treasury Debt
Back in 2008, the Fed's balance sheet was only $800 billion, but that figure has since soared almost four-fold to about $3 trillion. For the foreseeable future, the Fed will expand its balance sheet by $85 billion per month (about $1 trillion per year) from quantitative easing alone. Due to the Fed's seemingly endless easy money policies, its 0% interest rate policy, and the $1+ trillion annual U.S. government deficits that the Fed must continue to backstop, the U.S. dollar should remain weak in the worldwide currency wars.
Last Thursday, the Fed revealed that its holdings of U.S. government debt rose to $1.697 trillion, up 257% from $475.3 billion four years ago. The Fed has now surpassed China as the biggest holder of U.S. Treasury securities (and other U.S. government debt), since China owned "only" $1.17 trillion in U.S. government debt as of the end of November 2012. In the past couple of years, the Fed has been buying about 75% of the new U.S. Treasury debt issued, which is why it must continue its QE plans "forever."
The only hope for keeping annual deficits under $1 trillion is greater prosperity, generating higher tax revenues, rather than raising tax rates. Many rich French citizens have been fleeing France's new 75% top income tax rate. Now, we learn that former French President Nicolas Sarkozy and his wife, Carla Bruni, are planning to move to London to avoid French taxes (and some potential lawsuits). Here at home, California is chasing away some of its most successful residents with the new 13.3% top state income tax rate, on top of the new 39%+ top federal rate. The latest example is golfer Phil Mickelson. Years ago, Tiger Woods fled California for Florida, where there is no state income tax. Take a look at the list of the world's best golf or tennis stars: You'll be surprised by how many live in "tax havens." The governments of the world may want to soak the rich, but the rich can easily relocate.
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