Transitory means a temporary blip in an otherwise positive economic backdrop. The Fed’s preferred measure of inflation is the core - PCE Price Index which ticked down to 1.6% after a steady string of readings with a 1.8% handle. Consumer spending was also weak in the preliminary GDP report for Q1 2017 to which Chair Yellen said was also transitory. Positive information from the FOMC statement included: “job gains were solid”, “Business Fixed Investment firmed”, “economic activity will expand at a moderate pace” and “near term risks to the economic outlook appear roughly balanced”. Net, net - no rate hike as expected, but the ten yield U.S. treasury ticked higher with little reaction from equities today. Meanwhile, President Trump avoided a government shutdown, where of course, both republicans and democrats declared victory on the outcome of the bill. Please see Voya Global Perspectives™ Weekly for insights into global market returns.
S&P 500 earnings are on track for the highest quarterly growth in over five years (according to FactSet). The Energy sector is on track to be the biggest driver of earnings growth for the S&P 500 at $8.5 billion in Q1 2017 verses -$1.5 billion in Q1 2016. The Industrial, Financials and Technology sectors are also exceeding expectations for the quarter. Topline sales is on track to be the highest revenue growth at 7.5% since Q4 2011. This is the first time the index has seen sales growth for three consecutive quarters since 2014. Ten of the eleven sectors reported growth in revenues led by Energy with a 32.7% growth rate. Meanwhile, U.K. April manufacturing smashed expectations rising to a three year high at 57.3 as the Eurozone, U.S. and Japanese manufacturing PMIs continued to indicate a healthy expansion. Global manufacturing success bodes well for future earnings growth strength. Please see Voya Global Perspectives™: Fundamentals and Confidence Join Forces.
First quarter U.S. GDP increased by just .7%. This is not a surprise. Q1 has been notoriously weak in the last several years. However, consumer spending has usually been the one driving the economic bus. This quarter, there was a twist. The bulk of economic growth was shouldered by business spending. Fixed business investment increased 10.4% compared with consumer spending, up a measly .3%. Given the high level optimism and recent wage gains, consumers should step up spending in Q2. And the fact that companies are spending more on structures and equipment is a positive for sustainable long term growth. But, no matter how you slice or dice it, U.S. GDP has been below long term trend throughout the entire recovery. The Federal Reserve cannot create long term growth through interest rate policy alone. Businesses have been the missing piece of that puzzle. That is why corporate tax rates are so important. Please follow corporate tax rates on page 72 of the Global Perspectives™ book.
Why do car buyers kick the tires? The tires will tell very little about a high tech engine but kicking them is symbolic of analysis and thoughtful inspection before purchase. Investors will be kicking the tires on the proposed Trump tax cuts in the coming weeks and the markets may experience some ups and downs as a result. As of now, the details are sparse, the timeline is unclear and implementation via Congress may be more difficult than rebuilding your transmission. These headwinds are reflected in the ever cautious bond yields (UST 10 YR) which have ticked up only slightly to 2.3%. Bonds are well aware that GDP is expected to show only a 1% gain in Q1 (watch for the release tomorrow) and are waiting for some concrete evidence before lurching forward. However, looking down the road economic growth is looking stronger even without the Trump tax plan. Durable goods orders were up .7% in March, the third consecutive month of increases, reflecting a much needed recovery in business spending and new home sales were the highest in 8 years as consumers are confident and employed. Most importantly, earnings, the true driver of equity markets are coming in better than expected and being guided up for the remainder of 2017. Fundamentals are clearly indicating this is not the time to kick the market to the curb. Please follow capital expenditures on page 9 of the Global Perspectives™ book.
“Relief rally Europe” doesn’t quite capture the seeming euphoria that surrounded the French presidential primary outcome. The French establishments of the left and right are closing ranks hard and fast behind Emmanuel Macron. The implied probabilities are flashing a 90% likelihood of his winning. The relief rally can be seen in traditional hedges as well as global equity markets. Gold prices are down by $20/oz. The Euro has rallied by nearly 2%. The VIX is down to 10.8 from 16 two weeks ago. This is good for the global economy and the outlook.
And so developments in France, Germany, the Netherlands and even the USA have supporters of the current international system breathing a sigh of relief. A Le Pen victory in France is highly unlikely. German polls are showing that the nationalist AfD party is slipped to 10% public support, with its leadership in turmoil. The Dutch and now French elections have shown support, but not enough to govern, for nationalists. And there has been a seeming turn to a somewhat less hostile stance internationally from the Trump Administration. Perhaps unsurprisingly, President Trump came out against a stronger dollar. And importantly, he seems to have put aside some of his antagonistic standing with China as he ruled out naming it as a currency manipulator. Throw in the potential for a pro-growth global tax cutting competition kicked off by the US, the global economy is beginning to gather together what looks like a synchronous growth phase which will continue to support risk assets globally. Please review page 24 of the Global Perspectives™ book - Special Guest Blogger: Tim Kearney
The world breathed a sigh of relief after the first round of French elections and polling that actually seemed to get it right, the Nasdaq powered to an all-time high breaking the 6000 level and S&P 500 earnings growth, with 25 percent of companies reporting for Q1 is now forecasting double digit growth. Oh wait, there’s more. Bond yields have reversed their downward doom and gloom trajectory and are ticking up. Oh wait, there’s more. Despite all of the trade war talk, world trade volumes for the three months of December to February are 2.7% higher than during the three months before, the strongest growth in the 3-month moving average since 2010. And if that wasn’t enough to sate investors there is now even more. President Trump is proposing a corporate tax rate cut from 35% to 15% to boost economic growth. Yet equity flows have been predominantly negative this year and there is roughly $10 trillion in cash on the sidelines earning nothing. Many skeptical investors are dismissing the market’s rise like a late night infomercial. While it is always advisable to have cash for emergencies, ten trillion seems a little excessive. Please watch fund flows on page 83 of the Global Perspectives™ book.
The Eurozone flash PMI of 56.7 is a six year high and indicates robust expansion of economic activity, but investors are more concerned about the first round of French elections to be held on Sunday. Recent polling indicates the top four candidates are in a tight race with about 20% each. The top two will move on to the next round. A victory by the far left candidate, Melenchon or the far right candidate, LePen would be a shock to markets and would likely spark a European stock selloff. Center right candidate Fillon and center left candidate Macron are campaigning on labor reforms and corporate tax cuts both of which are badly needed in France. France has been one of the slowest growing economies in the Eurozone, growing only 1.1% in 2016. It also has an unemployment rate above 10%. The world is watching the election closely after the BREXIT and U.S. presidential election surprises. Please see page 4 of the Global Perspectives™ book for a globally diversified portfolio. Diversification can help smooth the bumps when markets get volatile.
We have had a firehose of positive economic data and after a few weaker data points the bearish economists parade out their Armageddon scenarios. I don't buy it. Today's Leading Indicator report, not usually a market mover, made headlines with an all-time record of 126.7. Add to this President Trump signing executive orders to help the U.S steel Industry, along with a photo-op with steel CEOs and steel union labor, and that was enough to make the market jump. Please review the Global Perspectives™ First Quarter Review and Outlook for my insight into the drivers of the market.
There has been a widening spread between soft (expectations) and hard (actual) data for the US in Q1, in part due to the strong jump in expectations (aka animal spirits). Consider the data published in the past week or so. The University of Michigan Sentiment Index is up 8% YoY in April, and the Expectations Index has risen by 12%. Despite rising mortgage rates, the NAHB – Homebuilders Index rose by 17% YoY in April. The NFIB Small Business Optimism Index jumped 13% YoY in March. Consumer Confidence from the Conference board is up a smart 30.7% YoY in March. The hard data are a few steps behind. The Blue Chip Consensus marked Q1 GDP to a meager 1.3%, with their Q2 GDP estimate remaining at 2.4%. Additionally, retail sales have been softer, manufacturing fell in March and Auto sales at 16.5mn is off the 18mn (annual rate) seen in late-2016. But, contrary to this, corporate earnings are accelerating and we expect record level of earnings in 2017. Economic data may be mixed but there is little question that the growth and reflation trade is not only intact but is broadening overseas too. Please refer to the Voya Global Perspectives™ book to follow these statistics along with the latest market results in the Voya Global Perspectives™ weekly. - Special Guest Blogger: Tim Kearney
Geopolitical risks have dominated headlines and now investors are worried about a few hard data “misses”, yet the data is actually very good. The U.S. manufacturing ISM index is over 55, household wealth continues to move higher, retail sales are near an all-time high, housing starts are up 9% year over year and unemployment is 4.5%. In addition, the international outlook is on the rise. The 2017 global economic forecast was just upgraded by the IMF to 3.5% growth, UK growth was upgraded to 2%, and China’s latest GDP surprised on the upside at 6.9%. Monthly data points will be volatile; the overall trend is up. Geopolitical fear distracts markets and clouds investor perceptions resulting in an exaggerated negative outlook. Fortunately, markets follow fundamentals. Please see the Q1 Global Perspectives™ commentary for the latest view on the economy and markets.