As is typical after an asset bubble, debt levels remain high. The classic hallmark of these sorts of economies is a debt-fueled buying binge on assets. The assets end up deflating in price, but the debt does not.
Consumer spending and consumer debt are a driver of agency REITs like Annaly Capital (NLY) and American Capital Agency (AGNC) as well as mall REITs like Simon Property Group (SPG) and General Growth Properties (GGP).
Low interest rates have propped up the economy over the last few years. They’ve also supported bond markets since low interest rates mean low bond yields.
The volatility index tends to be high when the economy is in a standstill or recession. That’s when credit markets tend to freeze.
Less volatile equity markets have led to the underperformance of VIX funds. The iPath S&P 500 VIX fund has lost about 37% since the start of the year.
If inflation picks up, the Fed will hike rates to rein it in. This would lead to Treasury yields increasing, which could cause Treasuries to underperform.
Due to the Fed’s bond buying program, the Fed’s holdings have continued to rise. The quantitative easing (or QE) program ended last month.
So why does this matter for investors? To the extent there is even a modest pickup in capital spending, this should help support U.S. equity market valuations.
While still relatively low by official estimates, capital utilization rates are probably overstating the amount of excess capacity, given the rapidly aging nature of the capital stock.
I would expect real long-term yields to continue to normalize, a development that in the past has been associated with higher levels of capital spending.
I expect the U.S. economy to grow by at least 2.5% this year, above last year’s 2% rate. This should provide CEOs and CFOs with greater conviction on end-user demand.
Consumer confidence, while low, is improving. During the first half of 2014, the Conference Board’s measure of consumer expectations averaged a little below 82, a material improvement from the previous four years.
While companies clearly have the means to invest, they lack the confidence in the face of a still nervous consumer and uncertain end-user demand.
Let’s compare yields for emerging versus developed market bonds, using ten-year US Treasuries (IEF), BofA Merrill Lynch AAA-A Emerging Markets Corporate bonds, and the BofA Merrill Lynch B and Lower Emerging Markets Corporate bonds.
Most emerging markets have less debt compared to their developed market counterparts. This means emerging market bonds aren’t as risky as you may think!
The Chicago Business Barometer summarizes current business activity. It’s also known as the Chicago purchasing managers’ index or Chicago PMI.
Conducted by the Federal Reserve Bank of Richmond, this monthly survey of manufacturing activity gauges manufacturing in the Fifth District of the US.
Each month, the Federal Reserve Bank of Dallas conducts its Texas Manufacturing Outlook Survey. The survey involves about 100 firm executives reporting on how business conditions have changed for a number of indicators.
The Chicago Fed National Activity Index is a weighted average of 85 existing monthly indicators of national economic activity drawn from four categories.
Investment behavior in the capital markets is largely guided by investor confidence. The more confident investors are in the growth prospects of the securities, the more they invest.