September 11, 2018
L&S Risk Pulse™ Score
Long-term macroeconomic conditions are strong, but at least several core economic indicators show weakness with noteworthy but outlying risk that requires monitoring. Valuations are approaching high for a majority of stocks.
L&S Risk Pulse™ Insights – “Soft or Just Softer”
Since the market topped in late January, we have been struggling with some of the economic data points that showed signs of weakening economic growth. For example, the Purchasing Managers index of non-manufacturing activity declined from 59.9 in January to 55.7 in July. Did that suggest a weakening of activity, or simply a correction from unsustainably high levels? On an absolute basis, any number above 50 shows expansion, so 55.7 is a solidly expansionary report. Still, it is understandable that the weakness caused us to pause and consider whether risks were rising, especially as other data points showed similar trends.
The problem with economic data is that the answer will come with time, but, as portfolio managers, we sometimes struggle with the patience necessary to let things play out. With quarterly performance reviews, sometimes several months can seem like an eternity.
Data reported recently supports the notion that the US economy remains quite strong. The Purchasing Managers Manufacturing Index just moved to new cycle highs and is as high as it has been since May of 2004. Likewise, consumer confidence, as measured by the Conference Board, also rose to new cycle highs, and is as high as it has been since November of 2000. The unemployment rate, at 3.9%, is as low as it has been since December of 2000. The question of slow versus slower seems to have been answered definitively in favor of slower. The US economy remains one of the bright spots.
To be fair, that is not the whole picture. Foreign markets, both developed and emerging, have struggled this year, and the data points have not turned. These trends look somewhat troubling. Is our theme of global synchronized growth in jeopardy? So far, we cannot find any nations within the G20 that are mired in a recession. A strong United States will be a locomotive engine that can pull many other nations along with it. Trade wars continue to add risk to the system, and while we are hopeful that a full-blown trade war can be avoided, we are not willing to ignore the risks entirely. We acknowledge that these global uncertainties may have contributed to the slower growth we have seen in other parts of the world.
As the calendar has turned to September, we are reminded that this month has, on average, been the most difficult month of the year. Technology stocks seem over-bought, and it seems that the leaders over the past several quarters may be yielding leadership to other industries and stocks. Mid-term elections have historically led to increased market volatility, and that adds to some of our concerns at this time.
Earnings remain the mother’s milk of stock markets, and earnings in the US are quite strong. This economic strength should continue the trend for quite some time. It is interesting to note that earnings are growing in emerging markets as well, but those markets are struggling due to other concerns. We continue to suggest that risks are mid-level. We see no signs of an emerging recession and expect the stock market to be higher 12 months from now.