Forward Into Broad, Sunlit Uplands

by: Scott Minerd

Summary

U.S. economy will strengthen as we move toward summer.

Overseas capital flows are keeping interest rates low.

This may be a year to ignore “sell in May and go away”.

Last week's first-quarter U.S. GDP data reflected weakness associated with the winter soft patch, however, with the effects of terrible weather now firmly in the rear view mirror, we should enjoy a rebound in economic activity in the second quarter. Unlike in recent years, I expect the U.S. economy will strengthen as we move toward summer.

The great conundrum, of course, is U.S. interest rates. With the American economy adding jobs, consumer spending accelerating, and economic data generally looking strong, interest rates should be rising rather than falling. Nevertheless, capital flows from overseas are playing a crucial role in keeping interest rates low. Firstly, we have the "Putin Put" -- as tensions escalate in Ukraine, there is a flight to safety putting downward pressure on U.S. Treasury yields. Secondly, Japan's first sales tax increase since 1997 will likely cause a slowdown in consumer spending, which could very well lead to an acceleration of monetary stimulus there. Such a move would likely prompt China to further devalue its renminbi currency, which would likely drive increased Chinese demand for U.S. Treasuries.

So in the face of strong U.S. economic fundamentals, which should be pushing interest rates higher, technical factors at home and abroad have driven interest rates in the opposite direction. This only adds to already improving U.S. economic prospects. Low interest rates and increasing employment will have a positive impact on housing and on consumer confidence and spending. We will also likely see a pick-up in mergers and acquisitions activity, and U.S. first-quarter corporate earnings have beaten estimates -- factors that should help push equity prices even higher. In fact, 2014 may be a year where it is wise to ignore the old adage to sell in May and go away.

Increasing U.S. Capex Should Boost Growth

Despite weak first-quarter U.S. GDP, which will likely be revised lower after Tuesday's trade figures, the American economy is on sound footing and looks set to accelerate over the rest of the year. Consumer demand was strong in the first quarter, and the economy is due for a surge in business investment. Rising business confidence, increased capacity utilization, and business surveys all point to increasing capex in the coming quarters. The most recent Senior Loan Officer Survey showed that bank lending standards continue to loosen, which should lead to a near-term jump in capex.

U.S. COMMERCIAL AND INDUSTRIAL LOAN LENDING STANDARDS AND CAPITAL EXPENDITURES

Source: Haver, Guggenheim Investments. Data as of 5/5/2014.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.