Macro Wrap – The Good, The Bad, and the Ugly

by Enis April 25, 2013 8:19 am • Commentary

As the SPX approaches new highs, mixed signals abound.  The most positive driver is continued global monetary easing, currently led by the U.S. and Japan, and many expect the ECB to join the party shortly, driving European shares to big gains this week (up 5% in just the past couple days).  That easing has led to the scramble for yield, driving money from cash into stocks and bonds.

The credit markets have been a direct beneficiary as well.  Corporate bond yields are near all-time lows, and CDS spreads in both the high yield and investment grade market are a picture of calm.  Here is an illustration of that calm, courtesy of Scott Grannis:

Screen Shot 2013-04-25 at 7.37.43 AM


European sovereign yields have also come down to near 3 year lows, and “systemic” risk seems a term from a distant past.  Against that calmer backdrop, the fundamental earnings outlook for stocks has hardly improved over the last 18 months.  Bespoke points out the weak beat rate for earnings and revenues to start this quarter’s reporting season:

Screen Shot 2013-04-25 at 8.06.52 AM


Screen Shot 2013-04-25 at 8.06.45 AM


And lastly of course, the macroeconomic data has started to turn once again, as it seemingly always does when we approach the summer months.  The Citigroup Economic Surprise Index has turned down in all regions, but the U.S. data is now missing expectations on average as well:

Screen Shot 2013-04-25 at 8.18.31 AM
Citigroup Surprise Index, Courtesy of Bloomberg

Of course, stocks have rallied in spite of such worries for much of the past year.  We are only 15 handles from touching the 1600 level in the SPX for the first time ever.  The real question remains – are investor expectations likely to readjust to weakening fundamentals, or are higher prices going to draw in more money anticipating even higher prices.  I am skeptical, but I’ve also been wrong to expect lower prices so far this month.