The new year has been off to a bumpy start, leading some skeptics to question the bull’s viability. However, the latest round of global data suggests stocks still have firm economic support—volatility could very well persist, but so should the bull.
US Retail Sales
US Retail sales data for December rose +0.2% m/m (+0.7% m/m excluding auto sales), closing 2013 on a positive note. Food and beverage (+2.0% m/m) and clothing (+1.8% m/m) were the biggest contributors, suggesting holiday spending was just fine—countering those bemoaning weak shopping forecasts. For all the concern about the effects a higher payroll tax or Washington gridlock may have on consumer spending, retail sales increased +4.1% y/y—consumers and incomes are resilient. This is just one part of a growing pie. From rising business investment and total trade to consumer spending and corporate profits hitting all-time highs, 2013 saw continued US expansion, largely powered by the private sector—a trend that should continue in 2014.
UK inflation fell in December to 2.0% y/y—its lowest level since November 2009. Some expressed relief at this news, claiming it gives the BoE room to keep rates low even after unemployment hits 7%—one of the BoE’s stated conditions for a rate hike. However, 7% unemployment isn’t an automatic rate hike trigger—it’s an arbitrary number the BoE picked to convince markets rates won’t rise for a long while. Rates will rise when they rise—perhaps when the BoE sees a need to contain inflation (which is traditionally why central bankers hike rates). And when they do, it isn’t the automatic negative widely feared—historically, stocks and economies have done fine amid monetary tightening. What matters more than the direction of rates is how decisions square with extant conditions—a longer-term issue and one investors will have to weigh when it happens, given the many follies of trying to forecast central bankers' moves. For now, what matters is the UK is in a sweet spot of accelerating growth and monetary supply without higher inflation, a classic goldilocks scenario.
Eurozone Industrial Production
Eurozone industrial production rose at its fastest pace in three and a half years at +1.8% m/m in November 2013. Country-wise, Ireland had the biggest increase, rising +11.7% m/m (+13.2% y/y) while Greece fell -2.2% m/m (-6.2% y/y)—illustrating how uneven economic results across the eurozone can be. As strong as November looks, though, it also doesn’t mean the region is about to take off—it’s just one strong month in a longer series of ups and downs. November’s strong industrial output—along with rising retail sales and rising PMIs—merely indicate the choppy recovery continues.
On the Periphery
Good news spread beyond the eurozone core—Spain and even long-beleaguered Greece had positive news too. According to Spanish Finance Minister Luis de Guindos, Spain likely grew +0.3% q/q in Q4, accelerating from +0.1% q/q in Q3 and continuing the climb back from 18 months of recession. And in Greece, Prime Minister Antonis Samaras announced his country may in fact have primary budget surplus for 2013, meeting a key target set by eurozone finance ministers—and potentially afford Athens additional flexibility on meeting debt obligations. While neither of these developments tips the scales globally, even small bits of positive news likely exceed the very dour expectations surrounding the eurozone periphery.
None of these stories are big news on their own—but together, and in concert with many other positive releases recently, they provide continued evidence the global economy is still advancing and faring better than many perceive. When economic reality exceeds expectations, the result is a fine fundamental backdrop for more bull market.