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Economic Update

By Georgi Popov '13  |  february, 2013, Issue 2
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The stock market continues its growth trend. The S&P500 index has gained 6.6% since the beginning of the year, boosting cash flows into stock mutual funds to their highest levels in more than a decade. According to Lipper, net flows into stock mutual funds have totaled $44 billion YTD. This is evidence that investors are growing more confident in the strength of the recovery and are finally moving money from cash into equity. However, they are proceeding cautiously, and for good reasons.

Risks of negative shocks remain, specifically those related to spending cuts stemming from the sequestration that is scheduled to begin next month. Perhaps this is one of the reasons investors have pulled cash out of stock market ETFs, redeeming a net $1.8 billion in the week ended Feb. 13. Lipper pointed out that another reason may be the growing unease about the magnitude of the market's rally so far this year, and some investors feel that stocks are due for a correction, finding ETFs as the easiest way to take some profits off the table.

The Chicago Auto Show, the nation's largest and longest-running auto show, has been running all week at McCormick Place. Besides the display of shiny vehicles, the show reconfirms that automakers are feeling optimistic about sales in 2013. All three domestic manufacturers - GM, Ford and Chrysler – reported double-digit sales growth in January. The two biggest Japanese manufacturers – Toyota and Honda – also announced strong sales. This trend is likely to continue due to tailwinds provided by the aging of the U.S. vehicle park.

According to data from Polk sited in The Wall Street Journal, the average age of vehicles on the road is over 11 years, compared to only 8.4 years in 1995. Many of those vehicles will have to be replaced in the near future, increasing spending that will benefit not only the auto industry, but also many other like insurance, steel, rubber and glass. Abroad, Japan's economy contracted for the third consecutive quarter, posting a GDP decline at an annualized rate of 0.4%. This reconfirms the weakness of the Japanese recovery that has failed to gain traction for some time now and is experiencing a triple-dip recession. It started with a contraction in 2008-2009, followed by another one in 2010-2011, and continuing with the current recession that began last year. As a result, the Bank of Japan has become increasingly more aggressive in its monetary policy stimulus, so the next quarter will be critical in evaluating the benefits of the ongoing efforts.

Last Updated 2/25/13
Last Updated 2/25/13