Spring 2019 Market Outlook
Chief Market Strategist, David Lafferty, shares his views on the post-Christmas global rally – and what investors should know about where markets may be headed.
The post-Christmas global rally in both equities and corporate credit has everyone wondering, “Is global growth stronger than we expected?” Obviously the Fed’s downshift both on rates (now on hold) and its balance sheet (no longer on autopilot) was a huge boost for risk assets. However, we also can’t help but feel that investors are seeing (or imagining) new spring growth after the fourth quarter’s killing frost. Let’s examine the most recent macro data to see if it supports a continued rally in stocks and credit.
US GDP Head Fake
In light of the first quarter’s GDP reports, it makes sense to start in the US. On the surface, the quarterly real GDP print of +3.2% annualized was more than solid – better than consensus at 2.3% and much better than the 1.0%–1.5% expectation that prevailed from November through February. So much for all that recession talk investors were obsessing over. Yet, unfortunately for the macro bulls, the underlying details of the report were relatively weak. Personal consumption fell by more than half from Q4 (1.2% vs. 2.5%) while business investment was lackluster, boosted solely by the less tangible “intellectual property” component. Moreover, growth was artificially juiced by an unlikely-to-be-repeated collapse in imports. In addition, business inventories, which will eventually have to be liquidated, jumped for the third quarter in a row. All this left “final domestic sales” at a much-less-impressive +1.3% for the quarter. Keep in mind, all this “real” data was further bolstered by the weakest price adjustment in three years.
Even so, all is not lost. While we consider 3.2% growth to be a head fake, we still see very little in the data that would imply that growth is stalling or that a recession is imminent. US manufacturing data has stabilized and the ISM Composite Index1 at 56.0 would still be associated with real GDP near 3%.
In recent years, strength in the ISM data has overestimated GDP, so we doubt 3% is the true long run trajectory. However, even if this remains the case, this level of activity would still justify an economy growing at 1.5%–2.0%. Conveniently, that coincides with our unchanged view that the US economy is decelerating toward potential GDP near 2%, but not going into recession – at least not in the near term.
Europe: Subdued But Positive
In Europe, the growth outlook remains somewhere between dull and dreary, although not outright negative as many would have you believe. In spite of well-known political and structural headwinds, Europe is growing. It just isn’t growing very fast. After bottoming in January, the Euro Area Composite PMI Index2 has stabilized in recent months while GDP is running at +1.2% YoY. First quarter GDP perked up +0.4% quarter-over-quarter, the highest reading since Q2 last year. Across the largest economies, German business activity is improving after its automotive and manufacturing slowdown, France has regained modest momentum, and the UK remains in solid territory, if only due to the transitory effects of pre-Brexit inventory building.
All told, the European economy is growing in the 1.0%–1.5% range – unspectacular but consistent with its longer-term potential GDP rate. Growth is subdued, but moving in the right direction.
Is China Bouncing Back?
Similar to the US, more recent data coming from China looks significantly better than last year’s second half slowdown. Weakness in Chinese exports appears to be fading while industrial production shot up 1.0% in March – the largest monthly jump in five years. With this improving data as a backdrop, there should be little surprise that the China Caixin PMI Composite Index3 rebounded in March to its highest level since last June, to 52.9 from 50.7.
Source: Bloomberg, Natixis Investment Strategies Group, May 2016 - March 2019 (Monthly)
Based on the above data, we return to our original question: Should investors get excited that global growth is about to bloom? That’s a bit too optimistic in our view. Yes, there are some positive signs, but we see the improvement, such as it is, to be both modest and a bit transitory. However, at the margin, the global economy certainly hasn’t gone dormant and we think any oncoming recession may be pushed a bit further into the future.
While the data is somewhat better, we believe the underlying trajectory of the global economy has changed very little. Growth is at worst slowing toward its long run potential, and at best, not booming but merely showing signs of stabilizing. Absent an inflation surprise (in either direction), neither outlook is extreme enough to move the US Fed to tighten or loosen policy in the near term. With the Fed on hold for now, and consistent with our view for several quarters, slow but positive growth should be supportive of stocks and credit. Broad economic growth, however, is not strong enough to warrant more aggressive risk taking. With apologies to the Rolling Stones, we don’t see “dead flowers every morning," but be careful not “to put roses on your grave.”
2The Eurozone Composite PMI® (Purchasing Managers' Index®) is produced by IHS Markit and is based on original survey data collected from a representative panel of around 5,000 manufacturing and services firms. National manufacturing data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece. National services data are included for Germany, France, Italy, Spain and the Republic of Ireland.
3The Caixin Manufacturing PMI Purchasing Managers' Index is produced by IHS Markit. It measures the performance of the manufacturing sector and is derived from a survey of 430 private industrial companies.
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