This economy may not be perfect, but it’s the only one we’ve got, so let’s be thankful for the many positive developments we’re seeing both here in the States and across the globe. This week, as you sit down with loved ones, take a moment to appreciate how good things truly are right now.
Not only is the US economy growing at the fastest rate in years, we’re seeing healthy developments in many areas around the world. For the first time since the Great Recession, one can utter the words “synchronized global recovery” without being seen as a total nut case.
Today’s article is going to be chart-heavy because I want to give you a big picture view of trends, not just here in the US, but also around the globe. I know that many of you are sitting on big gains and are worried that the bottom may fall out of this market. Well, stop worrying – at least for this week – because economic fundamentals remain strong.
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Let’s begin with a look at things here in the States, then we’ll broaden our view to the global landscape.
As you know, the US economy recently posted two consecutive quarters of 3% GDP growth for the first time since 2014. This means that our economy has momentum. But is that momentum increasing or decreasing?
One of the best ways we can gauge that is to look at The Conference Board’s Leading Economic Index (LEI). As you’re probably well aware, this index utilizes 10 separate leading indicators to create a broad picture of where the US economy is headed.
The latest figures were released today, and show the LEI rising an impressive 1.2% in October. This follows a 0.1% increase in September and a 0.4% increase in August. You can see the trends in both the LEI and the Coincident Economic Index (CEI) in the chart below.
The LEI has a solid track record of identifying turning points in the economy before they occur, and right now the LEI is telling us that a recession in the next 6-12 months is extremely unlikely. In fact, last month was one of the strongest months in recent history, as nine of the ten leading indicators moved higher.
Please make sure not to gloss over that last part, as it’s probably one of the most important takeaways right now. Leading economic indicators are a prelude to economic growth, not just a snapshot of how things stand currently. When leading indicators are all moving up in harmony, it’s a sign of real growth on the horizon.
We also know that economic strength is translating into corporate profits, as profits remain at record levels. With roughly 95% of the S&P having reported, Q3 earnings growth stands at 6.2% and revenue growth is up 5.9%.
What about some of the other critical subcomponents of our economy? Let’s take a quick look at a few of those now.
Industrial production continues to recover nicely and is growing at its fastest pace since 2014 (2.9%).
Consumer spending remains strong, up 4.4% over the last year and trending up.
Businesses are finally investing again … private investment in the 3rd quarter was up 4.2% from last year.
Durable goods orders are also accelerating, and are up approximately 8% year-over-year.
Home prices continue to rise, creating wealth across the country. The latest figures show home prices rising by almost 6% per year.
And all the while, financial stress indexes remain subdued, and credit spreads remain tight.
I could keep going but I think you get the point. Economic conditions in the US remain favorable and supportive of continued growth. That, in turn, bears well for equity prices, which should continue to follow the trajectory of economic growth over the long run.
Now that we know conditions in the US are strong and improving, let’s check in with the rest of the world. This first table shows current expansion rates by country, in order of size. Notice any patterns?
By the way, this table goes down another 18 countries and yes, those ALL show growth as well … I just didn’t want to overwhelm you. Oh, and I should clarify – all EXCEPT Venezuela and Saudi Arabia.
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Moving on, we can see in the next chart below that global manufacturing PMIs (a leading indicator) are at multi-year highs as well.
But when it comes to leading indicators, why look at just one when we can look at many of them all at once? This next table below is also from The Conference Board and shows recent changes in the Leading Economic Indexes of major developed countries.
As you can see, leading indicators across the globe are almost all pointing up. So not only are conditions relatively good, they’re getting better.
The last thing I want to touch on from an international perspective is how the global economy is helping companies here in the US boost profits. In the chart below, which uses FactSet data, we can see that companies with more overseas exposure are reporting higher revenue growth and higher earnings growth.
This should further validate the idea that this is a global economic recovery, not just a US story. As much as Trump would like to take credit for all that has happened here at home, the fact is we’re just one cog in a very big wheel that is the global economy.
Okay, so what does all this mean for asset prices?
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There are a couple of ways we can interpret this. If we want to play the contrarian card, we can opt for the view that this may be “as good as it gets,” which means the market should be topping out now and we should reduce our exposure.
On the other hand, we have the notion of identifying and following the Primary Trend. In this case, we’re seeing strong evidence from just about everywhere that the primary trend is up. We’re seeing this not just in economic data, but in price data as well.
Therefore, even though valuations remain elevated, we must maintain exposure to this bull market. For all we know, it could continue climbing the proverbial wall of worry for years. And with the strong fundamental backdrop out there, pockets of weakness should be used as a buying opportunity for those who are underweight equities.
The preceding content was an excerpt from Dow Theory Letters. To receive their daily updates and research, click here to subscribe. Matt is also the Chief Investment Strategist at Model Investing. For more information about algorithmic based portfolio management, click here.
