By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management
Global leading economic indicators suggest decreased economic growth ahead with the U.S. slowing to a more sustainable 2-2.5% annual GDP growth rate as many other regions may struggle for any growth at all. While that does not sound like great news, slow growth is still growth, which can lead to higher corporate revenues and earnings, as well as persistent jobs creation.
In fact, our indicators suggest that we should continue to see impressive jobs creation without significant inflation. Participation has increased as more people are reentering the labor force, which has boosted employment while not pushing the unemployment rate down and not advancing wage pressure too high by U.S. Federal Reserve standards. For example, the prime age employment/population ratio (our favored employment measure) has increased to 79.90%, which is close to the 2007 pre-financial crisis high. The U.S. labor force gains roughly 100,000 new entrants each month due to population growth, and we think there is an additional one million entrants that could reenter. With nearly seven million open jobs in the U.S., our economy has plenty of capacity both in available jobs and in available workers. This should translate to more consumers and increased consumer spending over time.
Consistent with slower growth ahead, market-based inflation expectations, such as the 10-year Treasury Inflation Protected Securities (TIPS) spread, remain lower than their 2014 peak but have rebounded from recent lows (exhibit 4). This implies that risks of near-term recession were overblown during the December market selloff while inflation is still tame.
With slower global economic growth and a lack of inflationary pressure, the U.S. Federal Reserve has curtailed monetary policy tightening plans as we expected them to. In addition, we think the European Central Bank and the People’s Bank of China may loosen their policies to stimulate growth and help buoy economic growth.
These shifts should lead to a continuation of their business cycles, increased corporate earnings growth and jobs creation, and higher stock prices. However, as markets have recovered from their December crash extremes, risks are pervasive, and we think investors should approach the markets with risk in mind.
The Cash Indicator
The Cash Indicator (CI) has declined to a level more consistent with historical norms. This points to a properly functioning market and lower risks. In December, the CI once again reflected higher market risks, but not to a level suggesting a significant reduction in market exposure. We think that the movement in the CI through December’s selloff and January’s rally is consistent with how the CI was designed to work.
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.