This Will Get Your Attention

Ralph 2016-11.jpg

by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management

That will get your attention

We have continued to closely monitor economic indicators for tariff-related impacts on business confidence but up to now it didn’t seem to have affected sentiment. However, that narrative seems to be changing, and we expect the administration will take note. It is one thing to have a trade war when GDP growth is 3.2 percent like in the first quarter of this year, but it is quite another when growth is slowing (possibly dramatically).

The IHS Markit Flash PMIs came out for the world’s largest economies yesterday and the numbers were somewhat alarming for the United States. PMI, or Purchasing Managers Index, is the result of monthly surveys of private sector companies. The composite PMI (which includes both manufacturing and service businesses) fell to its lowest level in three years in the U.S. The positive surprise in the report may have been the acceleration in the Eurozone which would be very helpful for global growth going forward.

Source: Capital Economics

Source: Capital Economics

Is this the beginning of the end?

With another positive quarter, this economic expansion will be the longest in U.S. history. If you measure from the prior economic peak, this is already the longest economic cycle in the modern era.

Source: Strategas

Source: Strategas

This cycle is noteworthy for both duration and sluggishness. This lethargy has ironically made it more durable, but also has made it feel more tenuous. We find ourselves wondering if this is the beginning of the end.

We have been positioning portfolios for later cycle dynamics by increasing more defensive sectors such as utilities and consumer staples and reducing the more cyclical sectors like financials and energy. We expect this expansion to last another 12 months or more, but dramatic slowing in economic indicators has our attention and hopefully it has the attention of the administration as well.

Week in Review and Our Takeaways

  • Stocks dropped on weak economic data, marking the third consecutive week of negative returns

  • Trade and tariff talk seem to be negatively impacting U.S. business confidence