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May 27, 2013

Economic Update

By Brendan Circle '14 and Heidi Zhang '14  |  may, 2013, Issue 2
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Georgi Popov '13, the writer of the Economic Update since January 2012, will be graduating and working for PIMCO in Newport Beach, CA. He has turned the reins over to two first-year contributors: Brendan Circle and Heidi Zhang. Chicago Business thanks Georgi for his contributions and wishes him the best of luck.

Prior to business school, Brendan was a senior portfolio associate on the investment grade credit desk at PIMCO and this upcoming summer he will be a member of the high yield credit research group at Franklin Templeton Investments. His time at PIMCO sparked his interest in following macroeconomic variables and he sees the economic update as a great way for students to stay engaged in what is happening in the capital markets and the broader economy. Being in the business school bubble can hinder engagement with the markets and he hopes to bring to light the key topics affecting our economy.

Heidi is originally from Los Angeles. Before Booth, she worked in investment consulting for Wilshire Associates and plans to work in investment management on the product/business development side after graduation. She's eager to contribute to this column because 1) Georgi is her idol 2) this column was helpful to her during recruiting and will hopefully be helpful to others and 3) market news is interesting and can be profitable!

Economic data released mid-May was fairly disappointing. The manufacturing sector remains weak, and factory output declined for the third time in the last four months. The week of May 12 also saw a sharp rise in initial unemployment claims and the biggest fall in housing starts in more than two years. The soft patch has pushed the inflation rate lower – the core CPI is now rising at a two-year low 1.7 percent - and has made a near-term tapering in the pace of Federal Reserve asset purchases less likely. The ongoing accommodation from the Fed and other central banks, along with the promise of additional easing in the event of further softening, has kept the markets moving higher even though the recent data have been mixed.

As earnings season comes to a close, corporations have shown continued signs of healing with strong bottom line growth. In fact, 73 percent of companies reported earnings that beat expectations over the last quarter. While this is a positive sign, 50 percent of firms have missed on revenue expectations, indicating that we still have room to grow in the recovery. However, you can't tell by looking at equity markets as the bull market continues. We are in the fifth year of tremendous growth of the S&P 500 which has surged more than 140 percent since hitting 12-year lows in 2009. Equities still look cheap compared to bonds and cash, but they no longer appear inexpensive when compared to their own history.

May 17 marked a major milestone on the continued recovery from the financial crisis. The Thomson Reuters/University of Michigan index of consumer sentiment was up seven points to almost 84, levels which have not been seen since 2007. Consumers have good reason to be optimistic. A news report from the Congressional Budget Office suggests that deficits, a major impediment to economic growth and the stock market, are likely to grow at a much slower pace in 2013 and 2014. Additionally, the volatility in the market (as measured by the VIX) is creeping up on an eight year low. It is clear that the equity markets rally, improving home prices, and central bank support have helped boost consumer confidence in the face of tax increases and sequester concerns.

Last Updated 5/28/13
Last Updated 5/28/13