Slowing economic growth may cause some market volatility or even a correction, but we think the real risk to equities is a recession. With little risk of recession on the horizon, many companies can grow revenues and earnings in a slow growth environment, which can support higher stock prices. Historically, equity prices peak about six months before a recession. With minimal risk of a recession in the near-term, our work suggests that equity prices can make new highs.
There are some strong fundamental trends that point to continued, albeit slower, economic growth. For example, global leading economic indicators suggest relatively muted global growth. Even though the vast majority of U.S. economic activity is based on the domestic economy, slowing global growth should create a headwind to U.S. growth. Meanwhile, personal income continues to slowly but steadily grow, up almost 5% since last year, along with personal spending. 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.
The combination of the stock market selloff and positive earnings growth has pushed the forward price-to-earnings ratio for the S&P 500 Index below its 5-year average. We think that this creates a good opportunity to purchase high quality assets, and a shift in Fed policy could provide the impetus for stock price appreciation.
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