As the year draws to a close, investment managers are reflecting on their successes while downplaying any shortcomings. Fortunately, there’s plenty to celebrate this year. Unless an unexpected twist occurs, U.S. stocks and bonds are set to finish 2014 on a high note, showing significant gains. Wall Street is prepared to take considerable credit for enhancing client portfolios. However, it’s essential to acknowledge the most crucial factor behind these gains: economic growth.
● U.S. 3Q GDP Revised Up to 5% | Fox
● U.S. Personal Spending Rises Slightly More Than Expected In November | RTT
● U.S. Personal Income Rises Less Than Expected In November | RTT
● Durable Goods Orders in U.S. Unexpectedly Fell 0.7% in November | Bloomberg
● New-Home Sales in U.S. Unexpectedly Fall to 4-Month Low In Nov | Bloomberg
● U.S. consumer sentiment rises to highest level since 2007 | Reuters
The U.S. economy experienced a boost last month, as indicated by the November update of the Chicago Fed National Activity Index. While the overall trend appears to be strengthening, the housing market is still unstable. Existing home sales declined significantly by 6.1% in November, marking the steepest drop in over four years. This follows recent reports of sluggish growth in housing starts and a decrease in newly issued building permits—suggesting that housing construction could slow down in the coming months. Given the critical role of residential real estate in the economy, these recent trends raise concerns about a potential threat to an otherwise growing economy.
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● U.S. sales of existing homes hit a six-month low, baffling analysts | WaPo
● Eurozone consumer confidence rises in December | Reuters
● French consumer spending rises less than expected in November | MarketWatch
● OPEC oil output will not be reduced even if prices hit $20 | BBC
● Italy’s October retail sales fell at a faster pace | RTT
● U.K. Q3 GDP revised downward for the year | MNI
● France’s Q3 GDP expanded by an unrevised 0.3% | MNI
While U.S. economic growth is predicted to decelerate in the fourth quarter compared to Q3, the latest revised forecast suggests a more optimistic outlook for GDP in the final months of 2014. The Capital Spectator currently estimates a 3.0% growth rate (real seasonally adjusted) for Q4, a notable increase from last month’s 2.1% projection. This new estimate indicates solid progress for the economy in its last quarter.
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● A survey from China’s central bank reveals more bankers believe the economy slowed in Q4 | Reuters
● The Bank of Japan states that Japan’s economy continues its moderate recovery | RTT
● Oil prices rise for the second consecutive day as Saudi Arabia expresses confidence in demand | Bloomberg
● U.S. gas prices hit the lowest levels since May 2009, according to Lundberg survey | Reuters
● A central banker in the U.K. predicts inflation will likely drop below 1% | MNI
● Do declining oil prices signal a greater risk of deflation? | Econobrowser
In tomorrow’s update for November, existing home sales in the U.S. are anticipated to dip to an annual rate of 5.25 million units, based on The Capital Spectator’s median point forecast from several econometric models. This represents a slight decrease from the October figure of 5.26 million units (seasonally adjusted annual rate).
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Last week, I highlighted some fascinating titles from The Capital Spectator’s Book Bits column, which appears every Saturday morning. Here’s Part II of the year-end review of economic and finance literature from 2014 that merits a second examination…
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is projected to rebound to a +0.12 reading in the upcoming November update scheduled for December 22, according to The Capital Spectator’s median point forecast. This forecast is moderately above the -0.01 reading from October, which indicated a below-average economic growth pace for the U.S. According to guidelines from the Chicago Fed, only values below -0.70 suggest an “increasing likelihood” of a recession. Based on the current November estimate, CFNAI’s three-month average is expected to stay at a level historically associated with above-trend economic growth.
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Real estate investment trusts (REITs) are taking center stage with their impressive performance among the major asset classes as reflected in our standard ETF proxies for key segments of global markets. Specifically, U.S. REITs are experiencing a remarkable surge. However, it’s important not to confuse their stellar results with those of foreign REITs, which are only seeing modest gains. U.S. shares of securitized real estate have soared over the past year (defined here as the last 250 trading days). Despite a recent dip in prices, the Vanguard REIT (VNQ) has posted a notable increase of 30.4% as of December 18. This outpaces the second-best performer—U.S. equities based on the Vanguard Total Stock Market (VTI)—by a factor of two.
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