Economy, Markets Outperform Expectations

by Anirban Basu 12. April 2013

Anirban BasuA Record-Setting First Quarter

Simply put, the first quarter of 2013 was a fabulous one for U.S. equity investors. The S&P 500 Index, the Dow Jones Industrial Average (DIJA), and the Nasdaq all ended the first quarter of 2013 on a resounding note. The Dow Jones was up 11 percent during the first quarter to 14,578.58– its best first-quarter performance in 15 years. The S&P 500 rose 10 percent to 1,569.19 while the Nasdaq rose 8.2 percent to 3,267.52. Both the S&P 500 and the Dow Jones surpassed previous record closing highs in March.

The national economy has also outperformed expectations thus far in 2013. Real gross domestic product tracked at roughly 2 percent on an annualized basis during the first quarter, far better than the 0.4 percent increase registered during the fourth quarter of 2012. Despite a disappointing employment report for March, which indicated that the U.S. added just 88,000 jobs, the jobless rate fell to 7.6 percent, a post-recession low. During the first three months of the year, monthly job growth averaged 168,000 jobs according to the Bureau of Labor Statistics (+148,000 in January; +268,000 in February).

Improvement in the broader economy continues to support recovery in the nation’s housing market. According to the National Association of Realtors, total existing-home sales in February rose 0.8 percent to a seasonally adjusted annual rate of 4.98 million units. That was up from 4.94 million in January and represented one of many pieces of information indicating that the housing market remains on an upward trajectory. On a year-over-year basis, existing home sales are up more than 10 percent – impressive given overall economic growth nationwide in the range of 2 percent. Home prices are also on the rise. The national median existing-home price for all housing types was $173,600 in February, up 11.6 percent from February 2012. That represents the 12th consecutive month of year-over-year price increases and the strongest gain since November 2005.

Perhaps most remarkably, higher stock prices working in conjunction with recent increases in home prices have allowed Americans to collectively recoup the roughly $16 trillion in wealth that was lost during the Great Recession and its aftermath. According to the Federal Reserve, net worth for U.S. households reached $66.1 trillion during the fourth quarter of last year, representing the highest level in five years and more than 98 percent of the pre-recession peak of $67.3 trillion achieved in Q3:2007. First quarter Federal Reserve data are likely to indicate that collective household wealth is now at all-time high, though it remains true that much of the gain has been concentrated among a relatively small proportion of households (i.e., those that own significant amounts of financial assets).

Corporate earnings continue to expand. The Bureau of Economic Analysis reports that corporate profits rose to $2.013 trillion during the fourth quarter of 2012. That represents an increase of 2.3 percent from the previous quarter and 3.1 percent compared to one year ago. According to the New York Times, corporate profits as a percentage of GDP are now at their highest level since 1950.

US Corporate Profits

 

Looking Ahead

It has been a long time since circumstances appeared so promising. But we are not out of the proverbial woods. The U.S. economy could slow significantly during the next few months as federal spending cuts begin to take hold. The Congressional Budget Office projects that $1.2 trillion in federal spending cuts could lead to approximately 750,000 job losses in 2013 alone. The March employment data provided us with a taste of things likely to come.

The second quarter should be very interesting. Both certain macroeconomic and corporate factors suggest that the financial market rally could persist, but there is a sea of potential hazards, including N. Korea, the eurozone, another debt ceiling debacle in Washington, Iran, Syria, Egypt, a sharp rise in oil prices and unanticipated inflation. While investors will likely want continued exposure to equities, there are many reasons to remain somewhat guarded. As always, financial diversification appears to be the most reasonable investment strategy to pursue.

 

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.



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