While the CFNAI’s current level is still consistent with economic growth, it does suggest that growth will sharply decelerate in the second and third quarters of this year, falling to about 1.8%.
To be sure, as the chart above shows, the 3-month moving average indicator has remained around 0 for most of the past three years. In other words, the CFNAI isn’t predicting a recession, but it is forecasting a continuation of the same slow-growth environment we’ve been in since mid-2009.
Unless the indicator significantly picks up in coming months, I expect the US economy to remain stuck in a slow growth mode for at least the next quarter or two. For investors, there are two implications:
1.) Beware of paying a lot for cyclical earnings growth that may not materialize. Among cyclical sectors, I’d be particularly wary about consumer discretionary companies, which have some of the most aggressive earnings growth assumptions.
2.) Expect more market volatility. All being equal, slower growth is normally associated with higher volatility. We’ve recently seen a modest pickup in volatility, albeit from a very low base. The CFNAI is suggesting that there may be more bumps to come. [VIX ETFs Rise]
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.