Will the Economy Continue to Stall?

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Last week’s report on the ISM Service Sector index didn’t provide much of a contrast to the growing number of observations of a first-quarter economic slowdown.

hot growth stocks to buyYes, the service economy is still expanding but not quickly, and in some respects, it’s barely moving forward. Only the employment gauge improved and not by much.

In fact, jobs are where the strength is. The employment situation continues to mend, with Tuesday’s Job Openings Labor Turnover survey indicating a strong, tight labor market. Lots of job openings and fairly few layoffs could lead to wage growth, which would help the consumer and would push up inflation a bit — not a bad thing.

And in the virtuous circle that is an expanding economy, a tight labor market might actually spur an increase in jobs overall.

Alcoa Inc (NYSE:AA) kicked off earnings season on Wednesday by beating estimates. The growth was driven by strong demand, particularly related to autos, which is part and parcel of consumer demand.

Q1 may be a bumpy earnings season, as lower oil prices and a strong dollar impact the fortunes of the large global companies that make up the S&P 500. The larger question is whether this will be a temporary setback in earnings or a lasting issue.

Europe is showing better-than-expected growth, with retail sales growing 3% over the past year and the service economies expanding in Sweden, Spain, Italy, France and Germany. This has translated into portfolio gains for us.

Diversification is demonstrating its value this year. While large-cap U.S. stocks have stalled recently, foreign stocks have taken the lead. Our favored means of accessing boots-on-the-ground investors in non-U.S. markets is up 9.4% on the year.

Switzerland became the first country to sell a 10-year bond with a negative yield on Wednesday when its 10-year debt was introduced with a -0.05% yield. In other words, investors are actually paying to hold Swiss 10-year bonds. Why would an investor buy a bond with a minus-five basis point yield?

A number of factors are at play here, but the bottom line is that a slightly negative yield is still better than alternatives. The Swiss central bank charges 0.75% on deposits, so compared to the cost of holding cash, the marginally negative yield on the 10-year bond looks better — well, relatively better, anyways.

Compared to the rock-bottom and negative yields found in Europe, the 1.31% yield on Vanguard Intermediate-Term Treasury Fund (MUTF:VFITX), or the 1.96% yield on a 10-year Treasury, which would be a U.S. equivalent as an intermediate-term, full-faith-and-credit sovereign bond, looks pretty good. That said, if you’re looking for bonds, I wouldn’t necessarily run out and buy a Treasury fund.

Editor Dan Wiener and Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, an award-winning monthly advisory letter that keeps subscribers abreast of recent developments at Vanguard, and provides long-term guidance for investing in the Vanguard fund family.


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/will-the-economy-continue-to-stall/.

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