By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management
Global economic growth for 2017 will likely be the strongest since 2011 according to annual GDP projections by the Organization for Economic Co-Operation and Development (OECD). Both the U.S. and the euro zone are growing more quickly than expected. In fact, the latest estimate of U.S. Q3 2017 GDP came in at a robust 3.3%. Importantly, several forward-looking indicators of economic growth suggest that that global economy should carry this momentum into 2018.
For example, The Conference Board’s Index of U.S. Consumer Confidence rose to its highest level in 17 years during November. Within this index, the sub-index of Jobs Plentiful made a new high, while Jobs Hard to Get fell to a new low. This bodes well for the labor market going forward. Combined, these indicators suggest a virtuous feedback loop where increased consumer confidence leads to increased spending, which can increase business confidence and investing.
Even at these elevated levels, our models suggest that equities have further to run. With the context of a constructive economic back drop, we then look for attractive relative values. As we discussed previously in our piece, What The Earnings Yield Can Tell Us About The Future, we think that earnings yield is one of the best indicators of future equity market returns. Meanwhile, we think that yield is often the best predictor of future bond returns. As you can see in the following graph, even at these elevated levels, equities look attractively priced relative to bonds. Certainly, high quality bonds are an important risk diversifier, but going forward, we continue to expect relatively attractive returns from equities.
Furthermore, tight credit spreads continue to suggest that any stock market selloff will likely be contained. We think that credit spreads lead significant equity market volatility by several months. The currently tight credit spreads suggest that any near-term equity market volatility will be contained and should not be feared.
As a money manager focused on managing risk in real time, we continue to monitor our dashboard of economic and monetary conditions. As we forecast out into 2018 and beyond, things begin to look more challenging in late 2018 and early 2019. By that time, we expect the U.S. Federal Reserve (Fed) to have raised interest rates in December 2017 and at least once more in 2018 (exhibit 4). Unless global economic growth and inflation work together to push long-term interest rates higher, we fear that additional policy tightening from the Fed could choke off liquidity. Tightening monetary policy too much could bring an end to this business cycle.
Our base case is that the Fed will get it right and not cause the next recession in the near-term. Still, we will be watching our dashboard of indicators closely for any signal that the Fed’s policies may be having adverse effects on global markets.
This article was written by Gary Stringer, CIO, Kim Escue, Senior Portfolio Manager, and Chad Keller, COO and CCO at Stringer Asset Management, a participant in the ETF Strategist Channel.
DISCLOSURES
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.
Index Definitions:
S&P 500 Index – This Index is a capitalization-weighted index of 500 stocks. The Index is designed to measure performance of a broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.