Market’s Fed Frenzy Can Finally End

Maybe now the Fed Frenzy can end. After months of market jitters about when the Federal Reserve would start tapering quantitative easing, we now know the central bank will trim its asset purchases by $10 billion monthly, starting in January. As I wrote previously, whether the Fed tapered now or in a few months would make little difference to the big economic picture. The change of Fed policy, the swan song for outgoing Chairman Ben Bernanke, is based on the belief that the U.S. economy’s expansion is sustainable and that the labor market is improving amid muted inflationary pressures. The Fed’s statement after its two-day meeting was exceptionally dovish.

Incoming Chair Janet Yellen has made it clear that the Fed’s primary policy tool in 2014 will be forward guidance, or signaling clearly to markets how it plans to act in response to economic variables. Crucially, the Fed said it will keep interest rates near the zero-bound well past the time it takes for unemployment to fall below its previous threshold of 6.5 percent. In addition, the Fed has added a 2 percent lower bound for inflation, below which it is unlikely to begin raising the federal funds target rate. Both the employment language and the interest rate focus push out the time frame for a rate increase longer than investors had previously expected.

As markets consider the roadmap to exit the unprecedented policies of the Bernanke era, it is worth remembering that in addition to prolonged, low interest rates there is plenty of Fed stimulus left. If the Fed continues the same pace of asset purchase reductions at each FOMC meeting, it will still purchase more than $500 billion of bonds before QE would end in early 2015. It may purchase a greater amount, or prolong quantitative easing, if the economic recovery is more jagged. To put that in context, the Fed’s second round of quantitative easing, from November 2010 to June 2011, amounted to $600 billion.

So, Fed-driven liquidity and improving corporate profit margins, spurred by a strengthening economy, should continue nudging asset prices, especially stocks, higher. Still, long-term investors should be mindful that the margin of safety for U.S. stocks is eroding in this mature rally, and although near-term returns could be strong, there will likely be better gains in European and emerging market stocks. For fixed-income investors, the bond market has already discounted the Fed’s actions, and so the place to look for strong performance in 2014 could be municipals.

Chart of the Week

Optimistic Outlook for Euro Zone Equities

The ZEW survey of investor expectations for economic growth in the euro zone surprised to the upside in the December release, reaching levels not seen since 2006. Despite lackluster third quarter GDP, economic prospects in the euro zone are improving, as fiscal drag diminishes and the periphery narrows its competitiveness gap with core countries. Expectations of better growth have historically been positive for European equities, as seen by the close relationship between the ZEW survey and growth in the Euro Stoxx 50. Combined with favorable valuations relative to the United States, there is considerable near-side upside to euro zone equities.

Read More: http://guggenheimpartners.com/perspectives/macroview/market’s-fed-frenzy-can-finally-end

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You Would've Made A Ton Of Money If You Had Bought What Wall Street Said To Sell

I heard an amazing statistic earlier this year. According to Bloomberg, the 50 stocks with the lowest Wall Street analyst ratings at the end of 2011 outperformed the S&P 500 by seven percentage points in 2012. 

Think about that. Warren Buffett's goal was once to outperform the market by 10 percentage points a year. Doing the opposite of what Wall Street's smartest minds recommended last year got you two-thirds of the way there. 

As we head toward bonus season, how did finance's top analysts do this year? I dug through FactSet data on companies with the most buy and sell recommendations as of January. 

Drum roll...

The Motley Fool

Includes dividends, through December 11, 2013.

The S&P 500 is up 27.4% year to date, including dividends. So, companies with the most sell ratings in January outperformed the market by a median 25 percentage points, while those with the most buy ratings underperformed by more than seven percentage points. 

Bravo, gentlemen. 

There are two takeaways here. 

One of the most important lessons in all of finance is to understand the incentives of the guy sitting across the table from you.

It sounds crazy, but a lot of professional stock analysts aren't terribly concerned with the accuracy of their picks. "Until recently, brokerage firms did not even track the accuracy of their analysts' opinions," Stephen McClellan of The Financial Times wrote in 2009. "It is just not an important part of the analyst's job description."

Institutional Investor magazine once surveyed mutual funds, hedge funds, and other big investors -- the folks who pay for Wall Street's research -- asking what attributes are most important to them in an analyst. "Of 12 factors ranked in order of priority, stock selection placed dead last," McClellan wrote. "Industry knowledge was the key quality that institutions wanted in analysts." Individual investors hearing news of an analyst upgrade can be taken down a dangerous path without realizing this. 

But there's almost certainly something else going on here. It's the power of contrarianism. 

In 1999, at the end of the biggest bull market in history when stocks were as overvalued as they'd ever been, Merrill Lynch analysts issued 940 buy recommendations on stocks and sell ratings on just seven. Morgan Stanley had 670 buy ratings and not a single sell recommendation. Compare this with 2010, after the market crashed: Less than 30% of global stock ratings issued by Wall Street brokerage firms were buys. More than 50% were hold ratings, according to Bloomberg. 

In 2005, the investment bank Dresdner Kleinwort wrote a paper on the history of financial forecasts and found something astounding. When a composite of analyst forecasts on things like bond yields and stock prices were overlaid with what actually happened, the forecasts had an almost perfect lag. A few months after bond yields rose, analysts forecast that they would keep rising. A few months after yields fell, analysts switched their forecasts and predicted yields would continue to fall. Viewed in a chart, it was obvious what was going on: When forecasting the future, analysts were just looking at what happened in the past and drawing a straight line. "Analysts are terribly good at telling us what has just happened, but of little use in telling us what is going to happen in the future," the report said.

It's the same with stocks. Most of the companies analysts flooded with sell ratings earlier this year performed terribly last year. 

Markets will always assume tomorrow will look just like yesterday, moving as a herd toward what is often the wrong conclusion. The only way to protect yourself from this group-think is to train your brain to be allergic to popular opinions, taking contrarian views when everyone else is convinced they're right. Most people can't do that (by definition), but it's a trait you'll see in all the world's best investors. If you're uncomfortable making decisions most people around you think are wrong, don't try to beat the market. You'll never do it.

Read more: http://www.fool.com/investing/general/2013/12/13/wallstpicks.aspx#ixzz2nrWaN3VX

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BARCLAYS: First Reaction: 'Modest' Tapering With 'Soft' Inflation Floor

The following is Barclays Capital's first reaction to today's FOMC policy decision.

"The Federal Reserve announced a reduction in the pace of its asset purchases in December, saying that the pace of purchases would decline to $75bn per month beginning in January from the current $85bn pace. The committee is reducing its Treasury and agency MBS purchases by $5bn apiece, leaving the new purchase rates at $40bn and $35bn per month, respectively.

 The decision to taper went against our expectation of no change in the policy stance, but we had been highlighting that the incoming data since the September meeting raised the risk of a tapering in December and we felt the decision was close to a coin toss entering the meeting.

We did believe that the committee would strengthen its forward guidance if it decided to taper, particularly given the sharp fall in the unemployment rate in recent months. We read the December statement as imposing a “soft” inflation floor in its policy rate guidance. The statement says the committee “anticipates” that it will keep the policy rate within its current target range “well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” This is not as strong as saying the committee will refrain from raising rates until its inflation projections are at or above their longer-run target, but it does provide more guidance that the committee is prepared to let the unemployment rate drift lower if inflation remains subdued."

Copyright © 2013 eFXnews

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Fed Taper Message Succeeds as Bonds Adjust to Economic Data

After misleading investors with a time line for tapering its unprecedented stimulus, the Federal Reserve now is stressing that any reduction in bond purchases will depend on the economic outlook -- and the message is sinking in.

Officials surprised traders and roiled markets across the globe on Sept. 18 by maintaining their $85 billion in monthly asset purchases. Investors had clung to Chairman Ben S. Bernanke’s May guidance that he might taper “in the next few meetings” of the policy-making Federal Open Market Committee, ignoring the weakest back-to-back months for payroll gains in a year and a jobless rate that was falling partly because workers were leaving the labor force.

The Fed since then has emphasized that changes are “not on a preset course” and hinge on the economy. The result: When unemployment dropped to a five-year low of 7 percent in November, the odds doubled that the central bank would begin tapering its bond buying this week, a Bloomberg survey showed.

“A lot of people, including myself, are now looking at the data and saying, ‘Okay, if that’s the way they want to go,’” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. Before September, “all of this talk about tapering without the context of the numbers threw the market off.”

Fed Vice Chairman Janet Yellen, the nominee to replace Bernanke as chairman, told the Senate Banking Committee Nov. 14 that communications are “challenging” because the central bank is in “unprecedented circumstances.”

“So, it is a work in progress, and sometimes miscommunication is possible,” she said at her confirmation hearing in Washington.

The Fed’s unexpected decision on Sept. 18 to refrain from changing its policy sent stocks torecord highs and triggered the biggest rally in Treasuries since 2011. The yield on the benchmark 10-year note fell 16 basis points, or 0.16 percent, that day to 2.69 percent and continued to drop, reaching 2.5 percent on Oct. 23, according to Bloomberg Bond Trader prices.

With recent data showing continued improvement in the U.S. economy, yields have climbed, hitting 2.88 percent on Dec. 12 after a larger-than-forecast jump in U.S. retail sales for November. This followed a Dec. 6 Labor Department report that payrolls swelled by 203,000 after a revised 200,000 increase in October. The November gain exceeded the 185,000 median forecast of 89 economists surveyed by Bloomberg.

Volatility High

The week of the jobs numbers, the Bank of America Merrill Lynch MOVE index, a gauge of Treasuries volatility, reached 76.1, the highest since Oct. 11.

The Fed has said it will keep buying assets “until the outlook for the labor market has improved substantially,” so the payroll data, along with the retail sales numbers, have bolstered speculation Bernanke will announce a reduction in quantitative easing at this week’s FOMC meeting on Dec. 17-18.

The share of economists forecasting such a move rose to 34 percent in a Bloomberg survey conducted the day of the jobs report from 17 percent on Nov. 8. Fifty-three percent predicted last month that tapering would begin in March, compared with 40 percent this month.

Bill Gross, co-chief investment officer at Pacific Investment Management Co., said Dec. 6 that the pace of payroll growth in November made the probability of a taper on Dec. 18 “at least 50-50 now” after he previously saw “some logic for a January starting point.”

Year-High Production

Stocks rose today after Fed data showed U.S. industrial production increased 1.1 percent in November, the most in a year and more than the 0.6 percent gain forecast in a Bloomberg survey. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,789.31 at 10:27 a.m. in New York.

Silvia predicts the Fed won’t taper until March or June, depending on the economy. One challenge the U.S. central bank will face is how to square their so-called data dependency with inflation that’s running below their 2 percent target, he said. Prices are accelerating at a 0.7 percent annual rate, the personal-consumption-expenditures price index showed in October.

Federal Reserve Bank of New York President William C. Dudley said it’s “not disturbing” if interest rates rise because the economic outlook is improving. If financial conditions tighten because markets have an “unrealistic view” of the outlook for monetary policy -- as happened between May and September -- that is concerning, he said at a Nov. 20 press briefing at the district bank.

‘Broadly Right’

“It’s important that people get our message broadly right,” Dudley said. If the market moves “inappropriately,” it’s more difficult for the Fed to achieve its goals.

Leading up to the September meeting, investors put less emphasis on the economic outlook because Fed officials were communicating concern about rising costs associated with their bond buying and “froth” in markets, according to Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

Bernanke said May 22 in Washington that policy makers were “quite aware of this issue and watching it very carefully.” It does “factor into our thinking about the appropriate amount of accommodation,” and the Fed could “take a step down in our pace of purchases” in the “next few meetings.”

Surprise Decision

The rise in interest rates that occurred from May to September wasn’t entirely unwelcome. “To the extent that some of the riskier, more levered positions have been eliminated, I think that makes the situation more sustainable,” Bernanke said Sept. 18 after the surprise decision not to taper.

“It wasn’t that the economic conditions had changed; the markets were perceiving that Fed officials were seeing the bubble-like conditions they were causing,” Stanley said. Policy makers have “gone back to where they were earlier in the year where it’s just about the economy.”

Bernanke defended his communications on Nov. 19, saying the September FOMC decision was “appropriate and fully consistent with the earlier guidance.” While he’d said in June the central bank might trim its purchases this year and halt them altogether by mid-2014, he had “also emphasized that the path of purchases would depend on incoming data and could be slower or faster than envisioned,” he said in a speech. “I noted that the pace of purchases could be increased for a time, if warranted.”

Monetary Accommodation

Policy makers’ efforts to underscore the link between economic data and the level of monetary accommodation makes it unlikely the Fed will adopt a proposal to accompany any tapering decision with a timetable, according to Silvia. Atlanta Fed President Dennis Lockhart, Dallas Fed President Richard Fisher and Charles Plosser of Philadelphia -- none of whom vote on policy this year -- all have endorsed the idea of a schedule.

“If you’re going to say you’re data-dependent, then to give me a calendar -- you’re going to have trouble,” Silvia said. “Stop being so specific. You don’t have everything under control, then you over-promise and under-deliver.”

The Dec. 6 jobs report prompted Ward McCarthy, chief financial economist at Jefferies LLC in New York, to forecast a “gentle” taper of $5 billion a month starting in December. McCarthy had correctly predicted the FOMC would maintain the pace of its quantitative easing in September, though he wondered in a note to clients at the time if he was “putting too much emphasis on current economic conditions.”

The “data really does argue for them to do something,” McCarthy said in Dec. 6 interview on Bloomberg Radio. “The unemployment rate is within half a percentage point of a level that at one time they told us would trigger raising rates, and they haven’t even started tapering yet.”

To contact the reporter on this story: Caroline Salas Gage in New York atcsalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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DEUTSCHE BANK - 8 Predictions & Trades For 2014

8 Predictions (and Trades): 

1. Tapering will happen, and it won’t matter

2. US will take off, and it will matter - buy USD vs $bloc, short 5-year US rates

3. Capital outflows will rise – sell CHF and JPY

4. Political surprises will move to EM – short TRY and BRL ; long CNH volatility

5. Central banks mispriced – long Scandi FX / short Scandi rates

6. Volatility will rise – buy FX volatility

7. Inflation, not deflation will be problem – long UK inflation breakevens, but neutral GBP

8. Europe won’t surprise – long carry via peripherals, reluctantly short EUR/USD.

George Saravelos Head of European FX & Cross-Market Strategy - Deutsche Bank

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GOLDMAN SACHS: What To Expect From EUR/USD In 2014?

"We maintain our EUR/$ forecasts at 1.38, 1.40 and 1.40 in 3, 6 and 12 months. This implies EUR/¥ at 135.2, 144.2 and 149.8 in 3, 6 and 12 months.

Compared with the UK, the upward revisions to consensus Euro area growth forecasts have been less spectacular. But they are still more notable than in most other countries. A number of additional factors support the EUR:

-A large current account surplus of about 2.5% of GDP.

-Moderate and stable capital inflows into the Euro area, in addition to the current account surplus.

-The ECB’s ability to ease policy is still frequently hampered by a strict inflation mandate and the hawkishness of some Governing Council members.

-Central banks have reduced EUR holdings in global FX reserves during the crisis and there is a potential to increase holdings again to reach the pre-Euro area crisis benchmarks.

But there are downside risks to EUR/$ too.

-Signs of stalling growth in the peripheral countries in the Euro area could force the ECB to act again.

-Fed Tapering, as discussed above, could lead to a EUR/$ negative shift in interest rate differentials.

-Renewed political tensions could hurt capital flows again.

Overall, it is probably best to describe the EUR/$ outlook as a flow-driven uptrend, which is at least partially offset by a EUR/$-negative widening of interest rate differentials. Upside and downside risks are linked to the relative strength of these two forces."

Thomas Stolper, Robin Brooks, & Fiona Lak - Goldman Sachs 

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CREDIT AGRICOLE: Ahead This Wk's RBA Minutes, FOMC: A Buy Or A Sell?

This week’s RBA minutes should maintain AUD pressure in the wake of Governor Stevens’ comments this week. Suggesting that a fairer value for AUD/USD was closer to 0.85, the governor’s comments have prompted not only significant currency selling but also an adjustment lower in policy rate expectations.

Reinforcing RBA board member concerns surrounding an inflated AUD TWI, this week’s minutes should therefore provide further fuel for bearish AUD speculators.

Indeed just as AUD’s perceived FX liquidity status relative to its GDP size provided abnormal levels of foreign investor demand during the Fed-QE liquidity boom, it now appears AUD will be singled out for abnormal levels of investor supply for similar reasons as markets move towards the post Fed-QE era.

We therefore look for AUD/USD to push lower this week towards the pair’s 5 August low of 0.8848 but warn of a possible temporary bounce on any Fed QE-taper disappointment.

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Economists Around The World Have Been Slashing Their Inflation Forecasts

"The big story this year is not the US spending sequester, the China slowdown or the ongoing European recession," said Bank of America Merrill Lynch's Ethan Harris back in May.

"The big story is inflation, or more precisely, the lack thereof."

Seven months later, the lack of inflation is still arguably the big story.

"Inflation continues to surprise to the downside," said St. Louis Fed President James Bullard on Monday.

Low inflation seems to be a pretty good reason for the Federal Reserve to keep its foot on the monetary stimulus gas pedal.

However, low inflation isn't strictly a U.S. phenomenon.

All around the world, inflation has been much more benign than forecasted by economists.

Bloomberg LP Chief Economist Michael McDonough tweeted this chart of how expectations for inflation have come down everywhere (excluding the Middle East.)

@M_McDonough

Read more: http://www.businessinsider.com/regional-inflation-forecasts-falling-2013-12#ixzz2n6v1z9BT

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Investors Aren't Displaying The Signs That Have Historically Marked Stock Market Peaks

Sentiment can be an important tool in measuring risk in the stock market. When investors get too bullish, it can be seen as a cautionary flag that the market may be due for a fall or a bubble is nearing its peak.

Fortunately, investors are not currently displaying signs of optimism that have historically marked a peak for stocks. When we look at sentiment, we focus most of our attention on the actions taken by market participants, rather than how they respond to surveys. A few key measures include: quiet mergers & acquisitions (M&A) activity, the lack of a surge in initial public offerings (IPOs), and only a very recent uptick in inflows into funds that invest in U.S. stocks.

M&A Activity Remains Quiet

A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses. The most recent example can be seen in the run-up in deals that took place in the mid-2000s that foreshadowed the 2007 peak in the stock market [Figure 1]. In addition, M&A deal premiums—the amount offered above the pre-deal price—remain around 25%, in line with the 10-year average.

LPL Financial

IPO Activity Is Not Surging

IPOs tend to soar leading up to market peaks when confident investors are eager to snatch up the shares in the newly public companies, as we saw in 1999 and the mid-2000s [Figure 2]. Currently, global IPO activity is not showing signs of heating up.

LPL Financial

Individual Investors Have Not Been Aggressive Buyers

While not always a sign of a market peak until it reaches extremes, a pickup in money coming into the stock market from individual investors is a sign of improving confidence.

Net inflows to funds that invest in U.S. stocks have been weak and only recently posted two months of back-to-back inflows—an occurrence not seen since early 2011. As presented in the Weekly Market Commentary from November 13, 2013 entitled Chasing Returns, investors tend to follow moves in the five-year rolling return for the stock market, which turned sharply positive with a double-digit margin over bonds about a month ago, helping to sustain the recent trend of inflows. We may be quite some time away from an extreme in the appetite of the individual investor for stocks.

LPL Financial

Currently these sentiment indicators, among others, are not waving any cautionary flags for investors despite the strong stock market performance in 2013 and since the low of nearly five years ago. However, we will continue to watch these indicators as a sign of rising risk in the market.

This post originally appeared at LPL Financial. Copyright 2013.

Read more: http://www.businessinsider.com/signs-this-is-not-a-market-peak-2013-12#ixzz2n6uEDB1W

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EUR Pain Trade – A Persistent Squeeze

As we go deeper into the month of December various forex trades will be capable of pushing investors down several market routes that sometimes make little sense. These directional trades tend to occur because of a lack of market liquidity - a questionable currency volume write-off. By this years "turn," this season will have throw forth some directional trades that will have confused and frustrated the average investor. Nevertheless, both this years "patience" trade (long USD/JPY) and "pain" trade (long EUR/USD) continue to dominate positional play. The market feels comfortable being short yen across the board, but being long EUR's never feels like a natural fundamental position.

Being short the 17-member single currency this quarter has been both expensive and the wrong position. Another natural squeeze on the weak short EUR positions has been in play since Friday's US NFP report. The stronger than anticipated November non-farm payroll report was expected to go some ways to support Bernanke and company to begin paring back on their $85b a month-bond-buying program. That should have led to the USD rallying against Emerging Market currencies. Instead, the knee-jerk pro-tapering trades got battered in a market reversal. It seems that the market is comfortable pricing out a potential December taper believing that there will not be enough support amongst the voting Fed members to push through a taper start this month. In fact the next FOMC meeting in less than two-weeks time has probably come too soon. Bernanke and company do not need to hurry, its policy intention seem to have been successfully filtered into the markets that it's "tapering and interest rate hike are different" and will not take place together.

Overnight, the Chinese Yuan rose to a record high outright (6.1130) as the PBoC guided the currency upward after the country posted its biggest trade surplus in almost five-years over the weekend. The Yuan move is very much inline with the broad dollar weakness and not wholly a proactive Central Bank initiative. To many the +13% jump in last month Chinese exports may bode well for the country rebound, but for its rivals in the US and Europe, perhaps not so much. A strong export number equates to increasing market share for Chinese goods. In the report, exports to both regions by China had increased by +18% year-over-year. China seems to be successfully taking market share away from both territories. This ongoing scenario will only increase friction between the economic regions – a general them for 2014. Other data revealed that China's CPI gain moderated in November. No one seems too concerned, as they expect Beijing to give market forces a greater role to eventually boost inflation.

Despite Germany's trade surplus being lower than expected in October (€16.8b), as imports sharply rose from September (China exports increasing), the single currency continues to find support this morning on pull-backs. The EUR slipped a few ticks on the news that this month's Euro Sentix index eased (economic health) to +9.3 from a +10.4 forecasted. However, for now consensus believes the pair will remain resilient to both weaker fundamental data and the ECB. The market continues to look for levels to position themselves long EUR's, particularly Asian Central Banks who seem to have an increasing appetite for the single currency.

Considering such things as rate spreads, the outperformance of US financial institutions compared to their Euro counterparts, and stronger US fundamentals, the EUR looks "pricy." The market obviously disagrees – it continues to feel comfortable owning EUR's, but, at the right level. Technically the scope is for the currency to retest above €1.3800+ now that a new high was printed this morning. The techies believe a close north of €1.3700 today will accelerate that move.

Stateside, following in the footsteps of last week’s revision to GDP, market focus will be on retail sales later this week. Some analysts expect the US business inventory report will get more attention than usual. Investors should anticipate market noise surrounding the Fed's policy decision to pick up in intensity until next week's FOMC decision on December 18. However, prior to the announcement, expect all economic data to be dissected for clues to a decision. Despite Ben and company being data dependent in its decision-making — one data point never made a trend. Today is the final day of Fed speaks prior to next week’s FOMC announcement (Richmond Fed Lacker - non-voter, hawk, St. Louis Fed Bullard 2013 voter, dove and Dallas Fed Fisher 2014 voter, hawk).

Read more: http://www.marketpulse.com/20131209/eur-pain-trade-persistent-squeeze/

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There's Almost No Relationship Between The Magnitude Of GDP Growth And Stock Market Performance

Stock market investors should be rooting for low single-digit economic growth next year—and the reason why has nothing to do with the Federal Reserve (Fed).

We forecast a low double-digit gain of 10–15% for U.S. stocks in 2014, as measured by the S&P 500 Index. This forecast for a slightly above- average annual return is rooted in our expectations for high single-digit earnings growth and a modest rise in the price-to-earnings (PE) ratio. An improvement in economic growth to an average 3% pace in 2014 should drive solid profit gains and boost confidence in the durability of growth.

Contrary to conventional wisdom, and what may be a surprise to those who see low single-digit rates of gross domestic product (GDP) growth as incompatible with solid double-digit stock market gains, GDP does not have to be booming to produce solid gains in the stock market — as 2013 can attest. In fact, there is little relationship between the magnitude of GDP growth and stock market performance.

There are perfectly logical explanations for this counter-intuitive fact. Strong GDP can be a sign of an overheating economy that may be due for a recession, and weak GDP may be discounted by the stock market ahead of an actual turnaround. As evidence, over the past 35 years, the S&P 500 posted gains in half of the 16 quarters that GDP was negative. Also, over the same time period, the S&P 500 posted gains in only about half of the quarters when annualized GDP was stronger than 6% and booming.

Historically, stocks have posted the most consistent gains when GDP has been around 3%. When GDP for a quarter was within plus or minus a half of a percentage point of 3%, the S&P 500 posted an average gain of 6.5% during that quarter—the highest of any 1% range in quarterly GDP and nearly triple the 2.4% gain when GDP was more than twice as strong. Even more impressively, when GDP was around 3%, the S&P 500 posted a gain in 22 of the 24 quarters [Figure 1]. That 93% batting average stands well above other GDP 1% ranges, even those with stronger growth, and is much higher than the 66% average for the whole 35 year period.

Looking back further to a full calendar year of GDP growth, rather than the usual annualized quarterly pace of GDP growth, we can see that 3% remains the sweet spot for economic growth as it pertains to the stock market. Since WWII, U.S. GDP of plus or minus 1% around the long-term average of 3% has produced an average gain of 16% in the S&P 500 and produced a positive return 83% of the time.

This is not just true of the United States; around the world GDP and stock market performance have not been closely related. For example, in 2013, the relatively sluggish pace of economic performance in the United States and Europe was not an impediment to much stronger stock market performance than in emerging markets that boast much faster economic growth rates. An example can be seen with Brazil and Spain. Brazilian GDP is expected to be 2.5% in 2013, while the stock market has declined 24.6%, measured by the Ibovespa Index in dollar terms year to date through last Friday. In Spain, GDP is expected to be negative while the stock market in Spain is up 24.3% this year, measured by the IBEX 35 Index also in dollar terms year to date through last Friday.

The risk to our forecast is from growth disappointing our expectations, not from policymakers derailing the recovery. Volatility in the months ahead is more likely to come from “growth scares,” when economic data may temporarily disappoint expectations on a path to better growth in 2014, rather than from the antics in Washington. A key lesson from 2013 is that the stock market and economy can overcome many challenges

by policymakers, including the fiscal cliff tax increases, the sequester spending cuts, the Fed tapering concerns, and the shutdown and debt ceiling brinkmanship. But a better pace of growth must materialize to find the growth sweet spot for clients; just more bond buying by the Fed is not enough to lift valuations from current levels to propel further gains.

This post originally appeared at LPL Financial. Copyright 2013.

Read more: http://www.businessinsider.com/little-relationship-between-stocks-gdp-2013-12#ixzz2mpXYzW89

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NORDEA: Stay Long EUR/USD, Buy Cable At 1.6265, Sell USD/JPY Below 101.50

The following are the outlooks and strategies for the FX market this week as provided by Aurelija Augulyte, a senior analyst at Nordea Markets. 

The EURUSD long from 1.3450 has performed, but now faces hurdle on the upside – the 1.3627, keep tight stop (1.3480). For the USD index (DXY 80.50) is key level: if we go below, the way for new recent lows opens up (EURUSD to 1.38+). If not, then EURUSD may well decline to as low as 1.3130… (where from it is likely to continue up). What would bring it there – a strong (200k+) payrolls number (consensus: 182k) this week, which would get the UST yield test the 3% mark. We see a softer reading, however (170k), and we do also expect a decline in ISM (to 55), as guided by recent regional surveys.

Not only Carney admitted glass “half full”, he also blessed the withdrawal of household mortgage Lending for Funding. The GBPUSD broke the downward range from below, and chances now are for further upside. This year has started with a broad loathing of GBP…and finishes loving it, with hopefully last doomers dropping their calls for “cable to 1.40″, and looking to diversify back. The GBP speculative positions are neutral, coming from significant shorts – room for more bias. The BoE meeting this week shouldn’t surprise, and the likely PMI decline from high levels will unlikely surprise. “Buy on dip” mode, limit order 1.6265 (stop 1.6140), the 1.6420 is key level on the way to 1.6610/40.

“End of commodity boom” story dominates the market place, allowing the USDCAD long and NZDUSD short to perform as hoped for. Still room for more – but trail the stops. The macro backdrop for CAD remains unfavourable as weak capex and slowing credit growth exposes one of world’s most overvalued housing markets. The IMF’s Article IV report last week also warned of risks “predominantly on the downside” and urged to wait with policy tightening. The BoC will hopefully acknowledge this in the meeting this week (Dec. 4) Consider lifting the USDCAD target (1.0650) – above here, sky is the limit…

Yen weakaning…broadly explained by (still) positive risk sentiment. Inflation coming higher last week has by many been named as evidence that Abenomics works. Undoubtedly the inflation pickup mostly reflects the past JPY weakening so far – we still need to see some wage growth to confirm this is not yet another “flash in the pan”. The USDJPY will face resistance at 102.50/103.15. Short if below 101.50 (still expect to see a larger correction). The 140 level attracts for the EURJPY – huge level to break.

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HSBC: EUR: 'Myth-Buster'

The EUR’s resilience in the face of a dovish ECB has encouraged a mistaken belief that the currency is being dominated by factors other than carry, notes HSBC.

To make the case for that, HSBC challenges two popular arguments, concluding they are not the key drivers of the EUR.

Myth 1: The EUR rise is being driven by the Eurozone’s improving current account balance.

"If current accounts mattered in G10 FX, we would be buying the USD ahead of all others, not the EUR. The US has seen a greater improvement in its current account balance than Europe, yet EUR-USD has risen. In fact, current account developments appear to explain very little about G10 FX during the financial crisis. In any event, the improvement in the Eurozone’s current account reflects weakness not strength. Extending EUR bull logic on this front would unpleasantly imply buying the currencies of any country suffering from a domestic demand collapse," HSBC clarifies. 

Myth 2: The EUR rally is due to rising investments in Eurozone asset markets.

"The renewed appetite for Eurozone assets seems a more compelling EUR bull argument, but Europe is not alone in enjoying fresh inflows into equities. In addition, portfolio flows are not the biggest element of the Eurozone’s capital account, with net foreign direct investment and “other” investment outflows comfortably outpacing net portfolio inflows," HSBC adds.

Where To From Here?

"Beyond these specious myths where the EUR bull is the hero, the reality is that the outlook for monetary policy is now once again the key driver to the EUR and much of G10 FX. The Fed is heading towards the exit for QE, whereas the ECB is likely to ease again. It means the EUR bullish run is likely to meet a tragic end, like all good myths,

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MORGAN STANLEY: EUR/USD Topping Out; Selling Season Begins

"EURUSD is trading at a premium relative to rates and yields. We investigate the reason for this EUR overvaluation and conclude that at current levels EURUSD offers good selling opportunities.

Several factors work in favour of a weaker EURUSD. The Fed is preparing to exit quantitative easing while the ECB debates measures to ease monetary conditions further. The US has laid the foundation for an investment driven economic rebound, while the lack of credit and fiscal consolidation pressure is likely to keep EMU’s economic performance subdued.

Hence, we project EURUSD to not only close the current valuation gap; we also expect wider growth differentials to reduce the relative attractiveness of EUR denominated assets, reversing the EUR inflows seen during summer. We expect EURUSD to initially test 1.29 followed by a decline towards 1.24 later next year.

Positioning is favorable for EURUSD shorts. Real money accounts are running long EUR denominated asset positions on a currency unhedged basis, while the many failed attempts to short the EUR by speculative accounts have made this group of investors cautious. The one-year sum of EMU’s current account, FDI, Equity and Bond net inflows has reached levels where in the past a moderation of inflows has set in, taking the steam out of the EUR advance.

We believe that EURUSD is now topping out and maintain our newly established bearish strategy."

Hans Redeker, Morgan Stanley 

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