By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management
Our economic models and analysis suggest that the pace of economic growth in the U.S. has peaked or will soon peak. The latest readings of real and nominal GDP growth (we prefer to focus on nominal GDP due to its inclusion of inflation and its relationship with corporate revenue growth) came in near the high end of the post financial crisis recovery range (exhibit 1). However, we expect both measures of economic growth to abate in the quarters ahead for a variety of reasons.
First, some of the recent drivers of economic growth have already begun to slow. For example, soybean shipments surged ahead of the newly enacted tariffs, which accounted for a larger proportion of exports during the second quarter (exhibit 2). Going forward we can expect these exports to decline as tariffs take effect.
Additionally, the residual effects from strength in the U.S. dollar will likely weigh on exports in the near-term, especially as the dollar’s strength continues. As Fed policy tightens with rate increases, it creates a headwind to domestic growth while the positive effects from fiscal stimulus, such as corporate tax cuts, fade.
Finally, we think the collective yawn by the bond market in response to faster GDP growth confirms this view. If accelerating growth were to persist, long-term yields and market-based inflation expectations should have risen further. The bond market seems to be suggesting that the burst in GDP growth will diminish in the coming months.
Although these events do not sound particularly constructive, they may foretell some positive things to come. A slowing in the pace of economic growth is relatively good news in our opinion because we think that it will cause the Fed to scale back its planned interest rate hikes before they cause the yield curve (the difference between long-term and short-term interest rates) to invert, choke off liquidity and maybe even cause a recession next year. We expect the Fed to raise interest rates one or two more times and then pause, which should allow slow growth to continue.
Slowing economic growth may cause some market volatility or even a correction, but we think the real risk to equities is a recession. In a slow growth environment, many companies can still grow revenues and earnings, which can support higher stock prices. A recession typically causes large declines in earnings with stock prices following suit. Our work suggests that will not be the case.
There are some strong fundamental trends that point to continued, albeit slower, economic growth. A few of the more significant trends that we see include an increase in commercial and industrial lending (exhibit 5). The rise in lending suggests to us that businesses are beginning to find growth opportunities worth investing in and banks are willing to lend capital to finance these opportunities.
Additionally, personal income continues to slowly but steadily grow, up almost 5% since last year, along with personal spending (exhibit 6). Finally, we expect jobs creation in the U.S. to remain above the approximately 100,000 new jobs per month that is required to keep pace with the estimated growth rate of the U.S. labor force. This should provide a positive feedback loop for consumer income and spending.
In aggregate, these positive fundamental trends and the slow growth of our economy should allow corporate revenue and earnings to rise, which can ultimately support higher stock prices (exhibit 7).
THE CASH INDICATOR
The Cash Indicator (CI) has slipped even further below its historical average and median levels. This suggests complacency in the markets despite continued headline risk. We would not be surprised to see equity market volatility increase, but the CI and our fundamental work at this point suggest that a stock market selloff is a buying opportunity.
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.