Six Recent Signs of a Pickup
Fundamental conditions began to slip last fall and continued through the first quarter of this year. Stocks lagged behind bonds during most of this time, and the economy ground to a halt in the first quarter. Now, it appears that conditions are firming somewhat as we enter the summer months.
If this sounds familiar, it should. Last year, we saw a similar pattern. After contracting at a 2.1% annualized pace in the first quarter of 2014, the economy roared back in the subsequent two quarters with growth nearing a 5% pace through mid-year.
With worry over the Federal Reserve (Fed), Greece, China, etc. grabbing headlines, we thought it might be helpful to list six clear signs of improvement we’ve noticed in the data over the past few weeks.
Six Recent Signs of a Pickup
- A turnaround in earnings forecasts for the S&P 500 on a rolling forward 12-month basis (near $125 of forecasted earnings by analysts);
- The U.S. Treasury curve is steepening courtesy of a backup of longer-term bond yields;
- Forecasted inflation priced into the bond market is back up near 1.9% (after sliding through the fall to 1.5% in January) reducing deflation concern;
- May retail sales were solid (up 1.2% versus 0% in April) and indicates steady final domestic demand;
- Payroll growth is better (280,000 jobs in May versus a revised 94,000 in March); and
- Labor compensation is up 2.6% in the first quarter (highest growth in a while).
Overall, these are positive developments for the domestic growth case. Internationally, we continue to see some signs of weakening demand as China’s growth continues to decelerate and commodity prices remain near multi-year lows. Additionally, we are mindful that valuations are higher relative to underlying earnings. The S&P 500 multiple on forward 12-month operating earnings forecasts is now 16.9 times versus a 14.1 times 10-year average. On a trailing net basis, the S&P 500 now trades at 18.4 times earnings versus a 10-year average multiple of 15.6 times.
Still, we are happy to see the recent improvement in the data flow which reduce the potential likelihood for further contraction in the economy and suggests a return to modest growth ahead.
LONG-RUN STRATEGIC POSTURE: Strategic allocations are set to reflect our long-run forecasts for key asset classes. We expect policy rates to remain low as central banks continue to push lower-for-longer rate strategies. Eventually, rates should rise back to more normal levels, but this is expected to happen gradually and unevenly. Fixed income returns are expected to lag current yields as rates rise. Equity returns will track moderate growth in global Gross Domestic Product (GDP) with little to no further lift from margin expansion (margins are already elevated). Equity valuations appear reasonable and in line with historic multiples, so no additional return is being attributed to margin expansion.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.
Kevin Caron, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst
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