Positive developments and ebbing recession risk
Although there’s no shortage of negative opinions circulating in the media of late, much of this simply comes across as noise that should rightly be ignored. When we look to the concrete evidence, however, there are many indications of ebbing recession risk for the U.S., which is beginning to extend to global markets as well. There are indeed escalated geopolitical risks to consider, but from a fundamental and sentiment perspective we see more upside than downside. What are some of the positives we are seeing?
1. Positive earnings growth momentum and guidance (Q1 S&P reported earnings, see charts below)
2. Strong leading economic indicators in combination with accelerating leading-to-coincident indicators (Conference Board)
3. Increasing global GDP economic growth projections (from the International Monetary Fund)
4. U.S. Markets hitting new highs with solid breadth readings (Value Line Geometric and Arithmetic Lines)
5. Inflation pressures still in check (based on core the PCE index which is the key inflation gauge of the Federal Open Market Committee)
There are many more, but these are some of the highlights. All of this, in combination with evidence of a synchronized global recovery, our positive core fundamental thesis that we reiterated again in our First Quarter Market Commentary, our own Milestone Recession Risk Composite being in the very low risk zone, and a history of similar low-volatility environments, should result in a continuation of the current positive trend.
Lastly, in addition to these above, there could be extra reason for optimism in positive fiscal changes out of the U.S (i.e. positive tax legislation). This remains to be seen, but the potential outcome would likely result in next year's corporate earnings growth significantly outpacing what is currently forecasted from the consensus.
If you wish to explore any of the points above in more detail, we would be happy to discuss with you.
We will leave you with a fun statistic that will hopefully come to bear this year. After the first 100 days of 2017, both the S&P500 and the MSCI World (ex-US) indices were up over 5% on the year. The good news is that when this occurs, at least historically, the returns for the rest of the year are statistically much stronger than for all other years. If we look at the S&P500 specifically, when up over 5% in the first 100 days, it has gone on to return an additional 9.5% on average with 90% of those times being a positive number. This is in contrast to all other years when the S&P500 index is not up 5% or more after the first 100 days it has averaged a return of just 4.5% for the balance of the year with a positive number 68% of the time.
Source: Bespoke Investment Group