U.S. stocks pulled back today after the S&P 500 reached a five-year high earlier in the week, which was supported by a host of improving macroeconomic indicators. Housing activity continues to show signs of improvement, mergers and acquisition activity is up 27% thus far in 2013, jobless claims are getting better each month and mutual fund flows show that investors are moving more money into stocks than bonds.
The Commerce Department said that factory orders were up 1.8% in December after having dropped 0.3% in November, but orders for core capital goods fell 0.3% after having improved 3.3% the month before. Orders for durable goods, which are those made to last three years or more, climbed 4.3%. For the year, factory orders were up 3% to $5.66 trillion after an 11.8% increase in 2011. The Labor Department announced that first-time jobless claims fell 5,000 to 366,000 and the four-week moving average dropped 2,250 to 350,500, its lowest level since March 2008. Same-store sales climbed 5% in January, a good sign given that taxes went up for many Americans last month as a result of the fiscal cliff deal and the fact that the Social Security payroll tax holiday expired. In another sign that consumers are spending, consumer credit rose by $14.9 billion in December, according to the Federal Reserve, mainly because of increases in student and auto loans.
The spending cut debate is underway
With the first part of the sequester looming on March 1, the next political “show down” is heating up. The President continued to take the position that he wants tax revenue to be included with the spending cuts as part of the deal. He is saying that he does not want to raise tax rates but instead cut tax loopholes. This is a bit concerning to us because Congress is notorious for not understanding the unintended consequences of their decisions. Our opinion is that they will have no chance to come to an agreement by the time the first round of across-the-board cuts of $85 billion are scheduled to take place in March (the total package adds up to $1.2 trillion in cuts).
Senate Majority Leader Harry Reid said he was expecting to push for new revenue sources in any deal, saying, “There are a lot of tax loopholes that should be closed.” Mr. Reid and his fellow Democrats in the Senate have promised to bring a budget to the floor for the first time since 2009. President Obama was also making the TV rounds with the same message, though he said he did not want to raise tax rates: “There is no doubt we need additional revenue, coupled with smart spending reductions,” he said. Later in the week, the president said that the nation had seen “the effects of political dysfunction” and added, “We’ve made progress, I still believe we can finish the job with a balanced mix of spending cuts and more tax reform.” Senate Minority Leader Mitch McConnell (R, KY.) dismissed the plans to close tax loopholes as “gimmicky tax hikes.” At week’s end, however, the White House stepped back from the fray and said it would leave the decision of how to handle the sequester to Congress.
Meanwhile, the nonpartisan Congressional Budget Office (CBO) released its annual report about the economy, including its 10-year budget projections which noted of the sequester, “The federal fiscal policy specified by current law will represent a drag on economic activity.” The CBO report also concluded that growth this year would be as much as 1.5 percentage points higher “if not for the fiscal tightening.” On the positive side, the CBO said the deficit for the fiscal year ending Sept. 30 would be $845 billion which would make it the first time in five years that it’s been below $1 trillion. That total would represent about 5.3% of GDP, about half of what it was in 2009 when President Obama took office and down from 7% last year, but still above the target of 3% that most economists advocate.
Other global macro events
Lastly, we are paying close attention to the other macro risks such as the latest developments in the European Debt Crisis and Iran’s nuclear development that could escalate tensions with Israel in 2013.
Otherwise, corporate confidence seems to be improving nicely which is evident from the increase in merger & acquisition activity thus far in 2013.