2016: Following the Reacceleration Script

October 28th, 2016

Last January, in the morass of falling oil prices, dismal returns across both stocks and fixed income, slowing global growth, and climbing market pessimism, Alphalytics maintained high conviction that recession risk was not elevated and 2016 would see a reacceleration in the economy. Today’s GDP release of 2.9% is indeed evidence that 2016 is following the script to the reacceleration story.

“Turbulent Markets have participants wondering if we are on the cusp of a recession. However, a comprehensive assessment of the nine economic risk factors shows no historical precedence of recessionary risk under our present scores.
The question isn’t ‘Are we heading for a recession?’ Instead, market participants should be asking ‘When are temporary factors pulling down markets (like declining oil prices) going to wear off?’  When this is done, investors are going to find the economy is still expanding.”
Tracking the Business Cycle Report
January 26th, 2015

Objective metrics in January revealed that recession risk was unambiguously low and the U.S. growth engine was still intact. Likewise, history revealed oil prices were largely disconnected from the equilibrium price and were exercising a disproportionate negative influence on headline data. Furthermore, when oil prices eventually climbed, the likely scenario was they would then assist that same headline data back into positive territory.

Indeed, manufacturing data soon troughed and has slowly climbed since the first quarter. Retail sales and housing have remained steady and strong. As of today’s release, GDP is also revealing a lift in aggregate activity while being led by personal consumption. The next act is for corporate earnings to participate.

Looking ahead, the latest data from FactSet shows S&P 500 earnings growth at 5.5%, while Thompson Reuters shows the first and second quarters of 2017 at low double digit growth. Much has been made about the five consecutive quarters of negative earnings across the S&P through Q2 of 2016. However, the worst is now behind us and the case for an upward earnings trajectory for the next three quarters is compelling.

History shows that stock investors have been handsomely rewarded when moving from periods of declining earnings to periods of rising earnings. While no period is exactly like the past, it would be highly inconsistent for stock investors to turn a blind eye toward an improving corporate outlook.

 

Christopher Riggs, J.D., CFP®, is the President of Alphalytics Research. To learn more about Alphalytics Research or the Economic Systemic Risk Index, please contact us at [email protected].

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