January 9, 2020
We think we’ve seen this before. The monetary and fiscal stimulus to buffer trade tensions has already started to improve the leading indicators of global growth. Monetary easing is in the pipeline and fiscal measures in Emerging Asia should continue to provide tailwinds. We expect global manufacturing PMI (our best leading indicator for global growth) will return to trend later this quarter and run above trend late Q2/early Q3. Most of the PMI reports over the last ~9mos have also shown lower inventories and we’d expect restocking sometime around mid-year. The S&P 500 gained ~29% in 2019 and it’s only reasonable for investors to question the upside potential after such a strong calendar year performance. There’s nothing particularly magical about calendar year returns other than being a 12-month unit of measurement and its potential implications for filing tax returns. And there’s nothing unusual about the trajectory of the S&P 500 (SPX) return relative to past episodes when global growth recovered. The SPX should continue to benefit from above trend global growth, but maybe not as much as other markets. International Equities have underperformed the SPX for the past two years. A change of investor perception about the durability of the cycle would likely benefit the most cyclical-sensitive and undervalued segments first…think Japan, Emerging Markets and the Eurozone, in that order. And it would also benefit US cyclically-sensitive groups over defensive ones…think Industrials and value sectors like Energy. But as my father would say while driving by a small town, “don’t blink or you’ll miss it.” We think the above forecast is tactical only, meaning 6-9 mos.