Monday, April 17, 2017
“Synchronized Global Growth”
While the post-election recovery has largely been attributed to optimism for the new administration’s initiatives, a closer look at recent economic data shows a different angle for recent strength.
Following a two-year downtrend in manufacturing and commodity-sensitive business activity, recent data has shown a synchronized expansion to the upside in key components of the global economy, and with a much wider lens. Recent economic readings have tended to surprise to the upside as evidenced by the CitiGroup Economic Surprise Index trending higher in all three major regions globally over the past 9 months. Such synchronized expansion has been elusive since the end of the Great Recession in 2009.
China’s first report on gross domestic product came out yesterday with a reading of 6.9% growth in Q1, the highest quarterly expansion in nearly two years. Europe is on pace for its best economic expansion in nearly six years with both PMI and GDP displaying renewed strength over the past six months. As the graphic below illustrates, the malaise in the U.S. looks like the roaring 20’s compared to what has transpired in Europe the past decade.
Recent sub-par growth in the U.S. has often been coined as the “cleanest dirty shirt in the laundry” or “the best house on a bad block” amidst paltry relative global growth the past decade. Now that Eurozone and emerging market economic activity appears to have broken out of its recent slumber, there is a whole different narrative that could play out in the chess game of global asset allocation for investment managers.
It has been easy to give up on anything ex-U.S. over the past five years given the relative trajectory of earnings growth and stock price returns; however, improving fundamentals is more than likely why international and emerging market stocks were able to outperform the U.S. in the first quarter, despite the rosy confidence from U.S. consumers and investors.
This harmonization in global growth is surely a welcome trend and could provide substance to late cycle growth expansion that was very much in need of such catalysts. Corporate earnings in Europe still remain below 2007 levels while the U.S. has long ago surpassed that high water mark. Brazil and Russia have now emerged from their severe economic downturns providing some of the largest pillars to recent strength in emerging markets.
Doesn’t it seem like forever ago that we were gushing over the demographic and consumption trends of these emerging economies?
This tells us that 2017 is shaping up to be a better year for investors with a globally diversified investment allocation. Throw into the mix a recovering U.S. earnings recovery and any one of the tax or fiscal stimulus initiatives that have now started to be discounted by recent headwinds to implementation, and there are plenty of opportunities left for near-term optimism in this extended bull market.
Jack Holmes, CFA® & Todd Feltz, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes, and are not guaranteed to occur in the future.
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