Central Banks Fall In-Line

The global economy worsened in recent months by most accounts, but policy changes are now in place that could foster some improvement. Central banks in the United States, China, and Europe recently began moving toward greater accommodation — a major shift from early last fall. The Federal Reserve is telegraphing a need for “patience”, China has unveiled tax cuts and increased bank lending, and the European Central Bank (ECB) is now signaling renewed stimulus. Slipping growth is the reason cited for most of this renewed accommodation.

Good Growth, Reasonable Valuation

The United States growth engine appears the most resilient versus other major developed economies, at least through the close of 2018. Output rose 3.1% in real terms last year, as underlying productivity accelerated to 1.8% (chart, below-top). Stocks generally declined last year while earnings rose, making stocks better valued. The S&P 500 now trades at about 16.5x forward earnings, in line with the last 5-year average valuation. The earnings yield, or inverse of the 16.5x forward multiple, is 6% which remains well above the 2.6% 10-year Treasury yield (chart, below-bottom). The combination of good domestic growth and reasonable valuations could provide some support for the bull case for U.S. stocks from here.

Europe Weakens Ahead of Key Brexit Vote

Other developed foreign markets like Europe remain under pressure. Weakness was on display again last week when Mario Draghi cut the ECB’s 2019 growth forecast to 1.1% from December’s 1.7% forecast. The central bank lowered forward guidance on rates, unveiled a fresh round of long-term refinancing operations (LTROs), and provided assurance that the ECB would hold off reducing its balance sheet.

In other European news, this Tuesday brings a major vote on Brexit.  On Tuesday evening, after a full day of debate, Parliament votes on Theresa May’s deal with the European Union. This revised deal, if shot down, could lead to the UK leaving the European Union on March 29th with no deal or a delay in the departure date. If accepted, the UK will leave the EU on March 29 as planned, but things will remain relatively unchanged unto December 2020 as a permanent trade deal is worked out.

We will just have to wait and see.

Summing Up

Although global growth has weakened from a year-ago, continued growth in the United States, better valuations, and a turnabout by global central banks could promote improvement ahead. While it is too early to sound the “all clear” signal, these factors could conspire to bring about positive change as the weeks and months ahead unfold.


Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst

(973) 549-4168




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