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BBVA Compass

Quarterly Market Update

Economic Outlook

Fed Announces Measured Exit

Economic Conditions Poised to Improve Along with the Weather.

Extreme weather conditions temporarily suppressed economic activity as a prolonged and harsh winter kept Americans indoors for much of the first quarter. However, the consumer confidence index rose to 82.3 in March, its strongest reading since it stood at 87.3 in January 2008, just before the Great Recession began.

While less satisfied with current conditions, consumers were moderately more upbeat about future job prospects and the overall economy.

The labor market picked up steam in February as employers added an estimated 175,000 jobs after two months of disappointing growth attributed to severe weather conditions. The number of people filing new claims for jobless benefits fell towards the end of the quarter to a four-week average of 317,750, suggesting some improvement in the overall moderate U.S. job market recovery.

Housing purchases were also hit by bad weather. New home sales have declined by 1.1% over the last 12 months, but are still expected to exceed 2013’s total of 428,000 which was the highest level in five years.


Economic Outlook

Figure 1. Severe weather conditions constrained economic growth in the first quarter, 2014.


Economic Outlook

Figure 2. Monthly job gains averaged 182,000 in 2013.


Tapering Appears Well Underway

The Federal Reserve continued on pace to exit its current bond-buying program by the end of the year. Faced with a faster than expected decline in the unemployment rate which ended the month of February at 6.7%, the Federal Open Market Committee elected to scrap the unemployment rate threshold of 6.5%. Many now anticipate that the first rate hike in the Federal Funds rate could come earlier, rather than later, in 2015 although the increase is conditional upon improving economic data.

Outlook

The 18-month recession ended in 2009 and while the recovery since has been slow, 2014 should be a brighter year for the economy particularly in the second half of the year once weather is removed from the equation. We forecast 2.5% GDP growth compared to 1.9% GDP growth in 2013. Personal consumption which accounts for 70% of economic activity should serve as the primary catalyst of the expansion as consumer confidence continues to improve and pent up demand for purchases that were delayed due to weather gathers momentum.

The 18-month recession ended in 2009 and while the recovery since has been slow, 2014 should be a brighter year for the economy particularly in the second half of the year once weather is removed from the equation. We forecast 2.5% GDP growth compared to 1.9% GDP growth in 2013. Personal consumption which accounts for 70% of economic activity should serve as the primary catalyst of the expansion as consumer confidence continues to improve and pent up demand for purchases that were delayed due to weather gathers momentum.

Weather aside, conditions that reared their heads this quarter were primarily non-U.S. driven. China is a potential threat in terms of their slowing growth as weakness in China portends possible weakness for the rest of the world due to the nation’s dependence on exports. Many S&P 500 companies are highly dependent upon emerging markets where the weakness has been fairly general. In January for instance, financial markets sold off due to currency issues in Turkey and weaker than anticipated growth in China. Overall expectations for emerging markets continue to be soft.

There are always factors that cannot be predicted, and the potential for geopolitical circumstances that could potentially impact the global economy and certainly the stock market still exist. But consumer spending picked up late last year more than was previously estimated and U.S. GDP growth expanded 2.6% in the fourth quarter. Since the recession ended in June 2009, annual growth has averaged only 2.2%. Once harsh weather conditions subside, the U.S. economy could be poised to build upon the fourth quarter’s trajectory, and to experience one of its strongest years since GDP growth of 3.4% in 2005. Risks to U.S. growth remain biased to the upside and the focus for domestic markets should return to fundamentals as Fed monetary policy normalizes.

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Other Sources: Bloomberg; California.gov; Russell.com; First page index returns are calculated on a total return basis using the following indexes: S&P 500 (SPX), MSCI World (MXWO), MSCI Emerging Markets (MXEF), Bloomberg 7-10 Year U.S. Treasury Index (USG4TR), Morningstar U.S. Agency Bond TR Index (MSBIUATR), Municipal Bond Buyer 40 Index (BBMIRNEW), Credit Suisse High Yield Index (CSHY), MSCI U.S. REIT Index (RMZ Index).