By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management
First quarter GDP growth was a sluggish +0.70%, largely due to slow consumer spending, in areas such as motor vehicle sales and utilities spending. However, we expect consumer spending and overall economic growth to accelerate over the coming quarters.
For instance, The Conference Board Leading Economic Index (LEI) recently moved above its previous peak, suggesting that the current U.S. economic expansion has years to run. As the following graph indicates, once the LEI moves above its previous peak, the next recession is historically several years out.
We believe that large equity market drawdowns of 20% or more are typically associated with recessions and the LEI’s history suggests that the next U.S. recession is years away. Barring a policy error by the U.S. Federal Reserve (Fed) of over-tightening monetary conditions, we think that the U.S. economic and stock market cycles have years to run. At this point, we think that the Fed is on the right track.
In addition to positive economic signals coming from the U.S., we are seeing signs of increased economic activity abroad. After slowing during the first part of 2016, the J.P. Morgan Global Composite PMI Survey has reflected steady and broad economic growth.
For example, in April the six sub-sectors of the index (consumer, intermediate and investment goods, as well as business, consumer and financial services) all registered growth with the most consistent readings across sub-sectors since the data was first compiled in October 2009.
This consistent global growth has come despite acute areas of uncertainty. For instance, despite uncertainty about the French election, bank lending in France has led the steady pace of lending growth in Europe.
Given these positive trends, we cast a wide net for investment opportunities in global equities. While we think that the U.S. equity market is a bit expensive, we are finding opportunities in certain sectors, such as consumer discretionary and health care. Moreover, we see attractive relative values in developed Europe and Japan, while we find emerging markets relatively unattractive from a valuation and risk standpoint at this time.
Though we may experience equity market volatility and a short-term equity market decline, corporate revenues and earnings should move higher with economic growth. Within this positive context, we are picking our spots where we find good relative value opportunities and attractive risk-reward tradeoffs.
THE CASH INDICATOR
The Cash Indicator (CI) has declined based on the confidence reflected in both the equity and credit markets. Though we expect market volatility to increase, at these levels the CI confirms our fundamental view that market declines are likely buying opportunities.
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Data is provided by various sources and prepared by Stringer Asset Management LLC and has not been verified or audited by an independent accountant.