TD Asset Management – The Bottom Line

The following is courtesy TD Asset Management and is posted with permission.


U.S. markets bid farewell to 2013 in style, with both the S&P 500 and Dow Jones Industrial posting solid gains, and ending the year up an impressive 29.6% and 26.5%, respectively. U.S. Treasuries on the other hand, sold-off as the year drew to a close, with the 10-year Treasury note ending the year at 3.05% – its highest level in over 2-years.

In what will likely go down as one of the most politically charged years on record, 2013 still managed to eke out a relatively impressive performance over the second half of the year. Sustained by a resilient consumer, robust growth in housing construction, and a rebounding labor market, the U.S. economy is on a pace to round out the final quarter of 2013 with growth of close to 2.5%. If this proves to be the case, growth for 2013 as a whole would come in at 2.6%. Not bad for an economy that has been restrained by an estimated 1.5 percentage points of fiscal drag over the past year.

The recent upbeat economic tone manifested itself in the Conference Board’s December Consumer Confidence report, which was released earlier this week. After posting declines for the past three months, largely thanks to uncertainty surrounding the government shutdown, consumer confidence rose to its highest level since early-2008. While most of gains were reflected in the consumer expectations sub-component, which captures how optimistic consumers feel about the economy over the next six months, the report also showed increased optimism about their present situation. The reasons for improved sentiment aren’t hard to find. Strong equity gains and rising home prices have helped strengthen household balance sheets and bolster net worth. At the same time, consistently stronger payrolls, a falling unemployment rate, and a gradually accelerating real hourly wage have left households feeling more optimistic about the labor market recovery.

In other economic news, the ISM manufacturing index for December and pending home sales for November were also released this week. While the ISM manufacturing index nudged slightly lower on the month, falling by 0.3 points and landing at 57.0, the details of the report proved to be far more constructive. For starters, both the employment and new orders sub-components recorded new multi-year highs. And, with supplier inventories slipping for the third consecutive month, the new orders-to-inventory spread rose to its highest level in over three years. Taking this alongside an elevated level of backlog orders and a gradually improving global economic backdrop will continue to provide support to the manufacturing sector.

Pending home sale – a 1-2 month leading indicator for existing home sales – posted a modest gain of 0.2% on the month. The release came in well below market expectations (+1.0% m/m), but marked the first gain in six months, suggesting that the worst of the impact on existing home sales following the 125bp rise in mortgage rates has passed. Furthermore, with housing affordability still at a historically high level, and an increased number of listings expected to make their way onto the market over the coming months, we expect the housing recovery to continue to make headway as we move through 2014.

As the week draws to a close, markets will turn their attention to Chairman Bernanke’s remarks set to be delivered at 2:30ET this afternoon to the American Economic Association. With just four weeks left in Chairman’s tenure, the speech will give Bernanke one last opportunity to reiterate both the Fed’s dovish tapering stance and the fact that a tightening in the policy rate is still several years away. This will allow for a smooth transition for incoming Chairwoman Janet Yellen, who will look to shape monetary policy through an increased emphasis on forward guidance and thus less dependence on asset purchases.

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