1st Quarter 2014 Commentary


Through the first three months of the New Year, there has been precious little progress made in U.S. exchanges or for that matter around the world. A number of commentators have opined that after such a robust performance in 2013, it was time “for a rest”.  We would not quibble with such a rationale for even animal spirits are subject to fatigue.  So what has happened, is happening and most importantly what might happen?

The figure on which everyone in the stock and bond markets seem to focus is employment.  Here there continues to be good news – despite the fact that the numbers can be volatile on a month to month basis.



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As can be seen above, in the past four years 8 – 9 million new jobs have been created and private sector jobs are likely to reach a new all time high in the near future.


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Importantly, the job growth has been in the private sector, which is more productive than the public.

Also, household leverage has declined significantly since its peak in 2009 and consumer delinquency rates are at an all time low as demonstrated by the following two charts.

CHARTS 3 & 4

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So with employment up and consumer leverage down, consumer confidence has had a very nice rebound, reaching its highest level since the Great Recession.


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Please note, however, that while consumer confidence has recovered, it is still nowhere near where it was in 2000 or even 2007.  The American consumer is definitely feeling better – but the recovery we have had so far we would not describe as exuberant or enthusiastic. So there are no “bubbles” in “consumer land”.

Corporate America continues to be very profitable.  Company profits as a % of GDP are near record highs, dating back to 1958.


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Interestingly, like consumers, companies have been paying off debt and have not been buying new equipment.  Corporate debt as a percentage of market capitalization is down to a record low, while the average age of fixed corporate assets is approaching 22 years.


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As “company chieftains” become as confident as the typical consumer, we think more money will be spent to replace and expand fixed assets.  This capital expenditure should in turn create more jobs.

So the economic backdrop of our consumer based economy – with a lower unemployment rate, an increasingly confident but unleveraged consumer, a very profitable and unlevered corporate America which needs to spend money on plant and equipment – would seem supportive of the equity markets.  But how expensively are the markets priced?


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At least as measured by a very commonly used yardstick, the U.S. stock market is not grossly overvalued.  It is not “cheap” – but it is not as “dear” as it has been in the not too distant past.  Markets have a “habit” of overshooting fair value to the downside and to the upside. We believe there is still more potential price appreciation, with company earnings, cash flow and dividend payouts providing stock price support.

A worry for quite a few investors is, “How much are interest rates going to rise?” To examine this, let’s take a look at current bond market thinking via the Treasury yield curve.


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April 30, 2013 marked the 2013 low point for the 10 year Treasury (1.6%).  The current yield curve represents today.  As is very evident, since 4/30/13, Treasury yields have gone up, as the Federal Reserve started to talk about “tapering” their quantitative monetary easing program.  However, the point we want to make here is that even with the “market” looking out five years via the futures (i.e. forward) market, the ten year Treasury yield does not pierce 4%, much less approach 5% – a yield level about which we have written in the past (see year-end 2013 Commentary) which historically provides the stock market with real competition for investor dollars.  So the prevailing bond market wisdom is that fixed income yields will go up (bad for bond prices) but not so much to hurt stock prices.

Lastly, we are including four charts which take a look at Russia, post its takeover of the Crimea.

CHARTS 10-13

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As pictured, the ruble has had a sharp fall, which has forced the central bank to increase interest rates to defend the currency.  This hike in rates, in addition to overall macro worries, has led to a sharp decline in the Russian stock market.  The Russian economy was already struggling before the Crimean incursion and it might be that the bond, stock and currency markets push the Russian economy “over the edge” and into recession.  Crimea has been and will be an “expensive geopolitical lesson” for Comrade Putin.



  • Housing will be an engine of growth for the U.S. economy. – Still believe but harsh winter held back builder plans
  • Employment will improve throughout the year. – Yes
  • Businesses will invest more money. – Still Believe
  • Companies will raise dividends & buyback stock. – Yes
  • The Fed will complete its tapering late in 2014, but will not increase short-term interest rates. – Yes
  • Economic growth in China will pick up speed, as will growth in Emerging economies. – China is planning on 7.5% v. 7.7% growth – others a “Mixed Bag.”
  • Asian consumer spending will grow. – Still Believe
  • The Eurozone will do better economically – as will Japan. – Yes
  • The U.S. bond market will have another bad year. – Still Believe
  • The U.S. stock market will have another good year.  So too will Eurozone & Emerging markets. – Still Believe – but not so far.


The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

The reported numbers enclosed are derived from sources believed to be reliable.  However, we cannot guarantee their accuracy.  Past performance does not guarantee future results.

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