The US Economy is Strong, Europe is Catching Up
February 6, 2015 | Print View
The US economy has been improving ever since the Federal Reserve began stimulating the economy (QE) back in 2009. Our economy has been stable and growing the last five years as:
- US interest rates remained low
- The consumer recovered
- Employment, housing and manufacturing have rebounded
- And corporate profits have soared
All this is good for stock markets. The impact of our improved economy and strong corporate profits has resulted in a strong U.S. stock market since the 2009 lows.
Gradient Investments has been constructive on the U.S. markets the last 3 years, but this year our forecast has changed a bit. While still constructive on the U.S. economy, we are forecasting a flattish U.S. stock market this year as the strong gains of the last several years are digested.
Recently, a couple of indicators we watch closely are reinforcing our belief the U.S. stock market will pause. On the economic front the US manufacturing PMI (purchasing managers index) has slowed down. This is a broad indicator for the health of the manufacturing sectors in the U.S. A reading above 50 indicates manufacturing growth, below 50 the sector is in decline. The chart below shows the manufacturing economy is still growing, but the rate of growth is slowing down.
At the same time, earnings for the 1st quarter of 2015 could decline year-over-year for the first time in quite a while. This is driven by sharp cuts to energy company profits as oil prices have plummeted in recent months. The chart below illustrates year-over-year S&P 500 earnings growth (red circle) in the first quarter:
Meanwhile, in Europe the ECB announced it will simulate their economy by injecting €60 billion a month into the region’s economy. The Eurozone economy seems to be reacting favorably to this.
In the chart below, look at the Eurozone PMI; it’s recently started to turn upward.
Also, European retail sales have been rebounding, signaling a more confident consumer across the pond:
Conclusion: We think it will get tougher to see strong stock market gains in the US during 2015, but we do see opportunities in international markets (particularly Europe). When economic growth and market strength rotates from one geographic region to another, we want to participate. The Gradient Tactical Rotation (GTR) strategy is an ideal way to gain exposure to strengthening international markets. The portfolio locates positive stock price momentum around the globe, and rotates assets to take advantage of this strength.
As of February 6th, 2015:
Dow Jones US Moderately Conservative Index is up 1.47% (TR) for the year
S&P 500 closed at 2,055.47 (TR) up 0.02% for the year
U.S. 10 year Treasury Futures are yielding 1.94% down 0.23% for the year
WTI Crude Oil futures closed at $51.96 down $1.75 for the year
Gold closed at $1,235 per ounce up $52 for the year
To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.
