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Sunny Skies, With a Chance of Growth

February 11, 2013

What’s fueling the rally, according to John and his team, is unprecedented monetary easing by the world's central banks, which are flooding the world with liquidity in a so-far successful effort to move investors into riskier assets such as stocks.
-John Toohey, vice president of equity investments, USAA Investments

In marked contrast to the Nor'easter barreling down on New England, it was another week of bluebird weather in the financial markets: low volatility and a continued grind higher in risk assets. We view the fuel for this rally as one of unprecedented monetary easing by the world's central banks, which are flooding the world with liquidity in a so-far successful effort to move investors into riskier assets such as stocks. We wish this were accompanied by signs of strong economic growth, but this is unfortunately only a wish.

Stocks powered to another five-year high, with the S&P 500 gaining 0.38% to close the week at 1,518. U.S. Treasury bonds also gained, with the yield on the 10-year declining 0.07 percentage points to close at 1.95%. Spot gold closed at $1,667 an ounce, flat for the week.

This week's economic data were mildly positive. The ISM nonmanufacturing composite for January was a healthy 55.2 (readings higher than 50 signal expansion), indicating that the service sector of the economy continues to grow. U.S. consumer credit rose in December by $14.6 billion, more than expected, led by borrowing for autos and student loans.

However, labor productivity, measured as output per hour, declined by 2% during the fourth quarter. With corporate profit margins at multiyear highs, this is a trend we are watching closely. Earnings have decelerated; earnings for S&P 500 companies are projected to grow 3% for the fourth quarter of 2012 and are expected to rise about 6% in 2013. However, even that optimistic rate of growth could come under pressure from increasing labor costs.

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