Bob Doll U.S. equities moved higher last week, with the S&P 500 advancing 1.40%.1 In the face of another disappointing employment report, positive recovery expectations provided tailwinds. Key manufacturing and service sector data surprised to the upside, and improved corporate confidence was highlighted by merger and acquisition activity. Developments outside the U.S. supported recovery and reform, and emerging market fears lessened. A potential U.S. military strike on Syria was an overhang as President Obama's decision to seek congressional approval raised concerns about other looming battles.
Global economy emerges from the past but is not quite ready for the future
The global economy appears to have emerged from the doldrums of 2012 and early 2013. Global GDP increased at an annualized 3% pace in the second quarter and seems on track for similar results for the third quarter.2 This reflects a move from contraction into recovery across the Euro area, alongside robust gains in the U.K. and Japan. Slightly above-trend growth in the U.S. and solid growth in developing markets is offsetting disappointing growth in emerging markets. The August Purchasing Managers' Index (PMITM) points to a constructive turn in the global manufacturing cycle. The report indicates slowing buildup of inventories and increasing growth in new orders – two developments that often precede increased industrial activity. In the near term, U.S. economic growth is on hold due to Middle East tensions, oil price spikes, Federal Reserve bond purchases, Obamacare uncertainty and regulatory overhangs.
The strong Manufacturing ISM Report on Business for August, along with near-cycle low jobless claims, suggests business conditions are firming. Acceleration for the U.S. in the second half appears probable, helped by a steepening yield curve, modest rebound in Europe and stabilization in China. Capital goods spending and industrial production should accelerate, and hopefully earnings estimates will begin to increase. Importantly, a near-term recession does not seem likely.
Current macro themes
August payrolls increased by 169,000 jobs but did not meet expectations. Also, payrolls for the previous two months were revised down. The unemployment rate declined to 7.3%, entirely accounted for by a 0.2% decline in labor force participation, equating to a new cycle low. The continued decline in the participation rate further justifies maintaining a very low federal funds rate.
The Fed does not appear to have reached consensus about tapering. July FOMC meeting minutes and recent speeches confirm this view. Our base case remains that QE tapering wi
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