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Macro View

Forward into Broad, Sunlit Uplands

May 07, 2014

It’s topsy turvy season as U.S. interest rates are falling when they should normally be rising and because 2014 might be the year to ignore the age-old advice to sell in May and go away.

Global CIO Commentary by Scott Minerd

Last week’s first-quarter U.S. GDP data reflected weakness associated with the winter soft patch, however, with the effects of terrible weather now firmly in the rearview mirror we should enjoy a rebound in economic activity in the second quarter. Unlike in recent years, I expect the U.S. economy will strengthen as we move toward summer.

2014 could be the exception to the “sell in May” strategy for US equities.


The great conundrum of course is U.S. interest rates. With the American economy adding jobs, consumer spending accelerating, and economic data generally looking strong, interest rates should be rising rather than falling. Nevertheless, capital flows from overseas are playing a crucial role in keeping interest rates low. Firstly, we have the “Putin Put” -- as tensions escalate in Ukraine there is a flight to safety putting downward pressure on U.S. Treasury yields. Secondly, Japan’s first sales tax increase since 1997 will likely cause a slowdown in consumer spending, which could very well lead to an acceleration of monetary stimulus there. Such a move would likely prompt China to further devalue its renminbi currency, which would likely drive increased Chinese demand for U.S. Treasuries.

So in the face of strong U.S. economic fundamentals, which should be pushing interest rates higher, technical factors at home and abroad have driven interest rates in the opposite direction. This only adds to already improving U.S. economic prospects. Low interest rates and increasing employment will have a positive impact on housing and on consumer confidence and spending. We will also likely see a pick-up in mergers and acquisitions activity, and U.S. first-quarter corporate earnings have beaten estimates -- factors which should help push equity prices even higher. In fact, 2014 may be a year where it is wise to ignore the old adage to sell in May and go away.

Increasing U.S. Capex Should Boost Growth

Despite weak first-quarter U.S. GDP, which will likely be revised lower after Tuesday’s trade figures, the American economy is on sound footing and looks set to accelerate over the rest of the year. Consumer demand was strong in the first quarter, and the economy is due for a surge in business investment. Rising business confidence, increased capacity utilization, and business surveys all point to increasing capex in the coming quarters. The most recent Senior Loan Officer Survey showed that bank lending standards continue to loosen, which should lead to a near-term jump in capex.



Source: Haver, Guggenheim Investments. Data as of 5/5/2014.

Economic Data Releases

U.S. Unemployment Drops as Consumer Spending Accelerates

Euro Zone Retail Sales Strong, China PMI Data Mixed

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

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