Macro View

We are increasingly tied to goings on in the rest of the world especially as exports now account for a record 13.6% of gross domestic product.  By that measure, trade’s contribution has never been more important to the U.S. economy than it is today.  Last year, the United States exported $2.3 trillion in goods and services, which in turn supported 11.3 million American jobs.  Over the last five years, the increase in U.S. exports accounted for approximately one-third of economic growth.  Capital markets, too, have become inextricably intertwined.

Global growth matters, therefore, and the news recently from many quarters of the world has been disappointing.  Recently, the International Monetary Fund (IMF) cut their growth estimate for the world’s advanced economies to 1.8% this year and 2.3% next year.  Europe is now expected to grow just 0.8% this year and 1.3% next.  This morning, Russia’s central bank acknowledged that their economy is dead in the water with no growth expected any time soon.  Brazil is seen by the IMF growing 0.3% this year and 1.4% next year, while Japan’s growth rate was slashed to just 0.9% this year and 0.8% next.

With this as a backdrop, President Obama is headed off to Asia to advance issues related to trade and the Trans-Pacific Partnership (TPP) that is a cornerstone of his administration’s trade agenda.  The partnership seeks to position the United States at the center of roughly 40% of global GDP and a third of international trade by negotiating a trade agreement through the TPP.  Massive markets, abundant energy sources, strong rule of law, skilled workforce and entrepreneurial culture are some of the main benefits the United States brings to the table in negotiating a trade deal.

While President Obama’s trip is not going to seal an agreement, it does lay additional groundwork for an increasingly important aspect of economic policy.  Establishing rules of engagement, bolstering relationships, and promoting development are all critical.  Once again, trade is the best source of growth especially in an environment where constraints on monetary and fiscal policies are increasing.  Also, as tensions rise within Asia, the strategic merits of trade agreements are also quite clear.

For now, we continue to monitor data from overseas alongside our analysis of capital market and domestic economic inputs.  The foreign component of our WCA Fundamental Conditions Barometer is trending lower, but still remains north of 50.  By comparison, data coming out of the United States is relatively strong.  Our barometer stands near 60, which is above the 50% level that would indicate growing concern over growth, but is down slightly from readings above 70 seen in the third quarter.

Earnings Update

Ninety percent of S&P 500 companies are done reporting third quarter results.  The expected S&P 500 EPS growth rate is now 7.6%, materially better than the 4.5% growth expectation at the start of the reporting season.  The forward 12-month earnings expectation for the S&P 500 is $128.37 placing the forward-looking price-to-earnings multiple at 15.8 times (6.3% earnings yield).  Full year earnings are $111.28 actual earnings in 2013, $119.14 estimated for 2014 (7% growth), and $130.12 (9.2% growth) estimated for 2015.