Federated Investor's Senior Equity Strategist, Linda Duessel, offers a Weekly Update. Below your find an excerpt from the week of April 22, 2016. If you're interested in reading the full report, download it here.
While valuation remains an obstacle, the NYSE advance/decline line has been making a series of new record highs, which is bullish, and many historical and breadth indicators are positive. Dudack Research also notes that, looking at 7 long economic cycles from April 1960 to March 2001, there tends to be an earnings decline or flattening in growth roughly 7 years following a major earnings peak. The average slump lasted 18 months, which equates to 101 months past the original peak. When overlaying the current earnings cycle vs. history, 2015's earnings recession had remarkably similar timing to the average earnings cycle slump. If this parallel were to continue, history suggests there should be a pickup in S&P earnings growth directly ahead in 2016-2017. Then again, we’re just a few weeks away from entering the historically unimpressive summer seasonal period, and seasonality tends to peak in June during election years. This summer could see added volatility with July’s Republican convention, where despite Trump’s strong performance in New York this week, it’s uncertain if he’ll arrive in Cleveland with enough delegates to prevent a brokered convention. Washington Analysis says Trump needs to win big in California to make the delegate math work. And California’s June 7 primary is one of the last of the season. Strap yourselves in! I very much enjoyed meeting with the advisers. My favorite question: “In your travels, does anyone ever disagree with you?” Hmm. Can’t remember when…
Positives
Leading indicators disappoint They rose by half the expected increase in March, hurt by the decline in housing permits, softness in manufacturing and less accommodative financial conditions. Still, the index is up 2.2% y/y, indicating slow but positive economic growth.
China Watch Last week we were encouraged by signs of stabilization in China; this week we’re reminded a worrisome credit bubble may be underpinning the improvement. China’s social financing rose $1 trillion in Q1, the fastest 3-month increase in a series dating to 2002. Bank loans drove the surge and total over $15 trillion, tripling in yuan terms since January 2009. The ratio of bank loans to industrial production has jumped to 160 from 100, where it hovered from 2000-2008. China seems to be getting less and less bang per yuan, i.e., it’s taking more and more credit to keep it growing at a slower and slower pace. As Larry Summers pointed out in January, “China put in place more cement and concrete between 2011 and 2013 than the United States did in the whole of the 20th century”—a level of construction suggesting the goal was boosting current activity, not making sound investments. Its mounting excess capacity in a slowing global economy is raising the risks of protectionism, a major issue the U.S. presidential campaign, and of painful consequences when credit slows.
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