WEEKLY MARKET COMMENTARY
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rst quarter o this year, the S&P 500 Index is up about 11% rom a yearago. This does not suggest booming job growth in the coming months. Inact, the 11% gain suggests only about a 1 – 2% year-over-year growth rateor jobs or a pace o about 180,000 per month. This would mark a modestslowdown — rather than a sharp re-acceleration o job growth.
Message From Bonds
Traditionally, in the bond market a rise in long-term yields relative to short-term yields is indicative o a stronger outlook or economic growth. Thebigger the dierence in these yields, in technical terms known as the slope othe yield curve, the stronger the expected pace o growth or the economy.This relationship can be seen inFigure 2, where the dierence in yields helpsto predict gross domestic product (GDP) over the coming two years.While short-term yields did not change in the rst quarter, remaining pinneddown by the Federal Reserve (Fed) at just under 0.1%, the yield on thelonger term 10-year Treasury note rose rom an average o 1.69% in theourth quarter o last year to 1.92% in the rst quarter o this year. While onthe surace an increase in the slope o the yield curve may suggest a bettergrowth outlook, when viewed in the historical context seen inFigure 2, themodest uptick in yield predicts merely a continuation o the roughly 2%GDP growth seen, on average, over the past couple o years.
Message From Commodities
Ater spending much o the ourth quarter o 2012 below $90, oil pricessurged to near $100 in the rst quarter, ending at $97. Since oil prices andeconomic activity tend to move in the same direction, is this $10 surge inoil prices a sign that demand is rising with increasing economic activity?Unortunately, the answer is no. We can see inFigure 3that this level o oilprices is consistent with the current modest pace o manuacturing activityrepresented by the widely-watched Purchasing Managers’ Index rom theInstitute or Supply Management in the low 50s.Despite the strong perormance in the rst quarter, it appears that themessage rom the markets on the economy is that modest growth is likelyto continue rather than accelerate. Just like last year, the strong rst quarterled to more o the same in the economy, averaging 2% GDP growth andmodest job gains.
Bonds Predicting Same Sluggish GDP Growth
Source: Bloomberg data, LPL Financial 04/01/13Yield curve is a line that plots the interest rates, at a set point in time,o bonds having equal credit quality, but diering maturity dates.The most requently reported yield curve compares the three-month,two-year, fve-year and 30-year U.S. Treasury debt. This yield curve isused as a benchmark or other debt in the market, such as mortgagerates or bank lending rates. The curve is also used to predict changesin economic output and growth.
‘87 ‘90 ‘93 ‘96 ‘99 ‘02 ‘05 ‘08 ‘116420-2-486420-2-4-6Slope of Yield Curve
Lagged by Two Years
Oil Prices Suggest Same Level oManuacturing Activity
Source: Bloomberg data, LPL Financial 04/01/13
‘08 ‘09 ‘10 ‘11 ‘12 ‘13160120$80$40$0706050403020Oil Prices
This level o oil prices is consistentwith the current modest pace omanuacturing activity.