NEWSWATCH

Markets Remain On Slow Growth Trajectory
As Pockets Of The Economy Gain Strength

By Tiffany L. Rider - Assistant Editor

December 3, 2013 – The economy remains on the same trajectory as it was on prior to the government shutdown in October, with pockets of strength in the technology and energy sectors. As the year comes to a close, there is much anticipation for fourth quarter 2013 numbers to be released in January and for a new discussion addressing the federal debt.

Those watching the markets are also eager to see confirmation of Janet Yellen as the new chairman of the Federal Reserve. Yellen is expected to act in alignment with the philosophy of current Federal Reserve Chairman Ben Bernanke, who announced earlier this year that the Fed would like to begin tapering its massive, $85 billion-per-month securities purchasing program as the economy picks up.

“The Fed is moving closer to where they’re going to start winding down their securities purchases,” Mark Vitner, chief economist for Wells Fargo, told the Business Journal. “It’s just a question of when and how quickly, and what else they want to do. What the Fed wants to avoid is spooking the financial markets.”

According to Mike Van Dyke, vice president of The Shadden Group of Morgan Stanley, the securities purchasing program, known as quantitative easing, has had a positive effect by creating stability through the most recent economic recession. He also indicated the program was a factor in the Dow Jones hitting 16,000 and the S&P 500 closing above 1,800 – the markets’ highest points ever recorded.

“It’s also helped other parts of the world,” Van Dyke said, noting that the low interest rate environment has attracted foreign governments like Turkey to take out loans here. “If we do get higher interest rates, it’s going to impact anyone with loans. It’s global.” That’s why, he said, the anticipation for what Yellen will do with the program has been tied to market investments. “We’re waiting to see what happens.”

Quantitative easing is in its third round. When the first round ended, the markets dropped by about 17 percent, according to Vitner. They dropped again after the second round closed. The Federal Reserve has been much more cautious in its approach to ending this third round, setting specific targets for employment and focusing on a tapering plan rather than a blunt end to the program.

The market trades on fundamentals, Vitner asserted, not by the excess liquidity being pumped into the market by quantitative easing. “The Fed is getting the message across that monetary policy is going to be supportive of markets for quite some time to come,” Vitner said. “Quantitative easing has only been with us since the financial crisis. We did quite well for many years without quantitative easing. We will do quite well without it.”

Looking at some of the bright spots in the economy, Vitner said the technology and energy businesses are booming in California, and tourism and entertainment seem to be doing better, also. Van Dyke agreed. “It’s exciting what technology can do for the world and for business,” Van Dyke said.

At the same time, the rest of the state’s economy is hit-or-miss. Construction is slow to turn around, and manufacturing remains sluggish outside of the automotive sector, he said. A big win for the state, he said, would be if Boeing decided to move its design and engineering work for the 777x aircraft to Long Beach.

It would be a signal, he said, “that you can do this type of work in California” at a time when businesses are said to be fleeing California due to the high cost of doing business in the state. “It’s the type of marquee announcement that might induce other companies to look at California who may not have in the past.”

Though it has deep talent pools, great universities and research opportunities, Vitner said California remains in a tough spot. The power of the Federal Reserve to maintain a low interest rate environment will help, Van Dyke said, particularly in driving sales numbers and in keeping industry investments moving forward.