More than Fed-side Chatter

Federal Reserve Chairman Ben Bernanke tries using the force to move markets. Source: Chip Somodevilla/Getty Images.

Here’s a common chorus from news pundits these days: “Follow the Fed—it’s the only thing driving stocks higher.” We disagree. In our view, declarations of loose monetary policy driving the economy too readily overlook positive economic fundamentals (specifically, data)—the true drivers of economic health. And they’ve been increasingly positive across the globe.

In the US ...

• The overall employment situation’s improving:
  • May saw more net job creation, and initial jobless claims are largely on a downward trajectory.
  • Plus private payrolls are steadily rising, despite fewer public sector jobs.
• Retail sales are up, rising in 10 of the last 12 months and +0.6% m/m in May (+4.3% y/y).
• ISM non-manufacturing continues rising—suggesting service industries and retail remain healthy and contributing to economic expansion. While the ISM Manufacturing fell in May, like retail sales, it’s increased in 10 of the last 12 months. One data point doesn’t make a trend.
• Housing prices, starts and sales are all rising. So is homebuilder confidence.
• US Q1 GDP came in at a healthy 2.4% SAAR, and growth is broadly expected to continue.
• Q1 US corporate earnings are expected to come in strong at 5.0% y/y—and thus far (as of June 14), 66% of US firms have beat earnings expectations. The forward 12-month price-to-earnings ratio is a far-from-bubble-like 14.4.
• While slowing some lately, the US Leading Economic Indicators are still registering growth.

In developed Foreign Markets ...

• UK Manufacturing PMI rose to 51.3 in May, and April’s slight contraction was revised up to slight growth.
• The UK’s much larger Services sector is growing faster still, with May non-manufacturing PMI increasing two full points to 54.9.
• May UK retail sales grew 3.4% y/y. While many in the media focus on High Street, online sales led the charge—rising 11% y/y.
• Japanese Q1 GDP grew faster than expected, a short-term positive (though we’d note structural reforms are necessary for Japan’s economy to see sustainable growth).
• Eurozone total trade rose in April at +0.6% y/y. (We note all isn’t rosy in the eurozone, but it’s by no means the Armageddon widely expected for years now.)
• Eurozone industrial production rose +0.4% m/m in April.
• German industrial production (+1.0% y/y) and trade beat expectations in April (+1.9% y/y growth for exports and +2.3% y/y for imports).
• The Trans-Atlantic free trade agreement between the EU-US is moving forward.
• Latvia’s poised to join the eurozone in 2014.

Even in Emerging Markets ...

• Official Chinese PMI unexpectedly rose in May.
• Brazil’s Q1 GDP grew 1.9% y/y.
• Rumors of US-China trade talks continue.

All better explain how global stocks are up thus far in 2013 than central bank policy.

In fact, in the US, Fed policy has actually been contractionary: A flat yield curve discourages banks from lending, making it more profitable—and less risky—to store excess cash as reserves than to lend to businesses or individuals. Similar situations developing in the UK and Japan further support our view the sooner QE ends, the better. But many fear Fed tapering, believing QE is the only reason the US has grown recently. But, again, central bank policy—though it can have an impact and is important to watch—doesn’t solely drive economies.