Morning Notes — Long-Term and Short-Term Forecast on Track

Japan flash manufacturing PMI for January improved to 49.3 from 48.4 last month and Eurozone flash manufacturing PMI improved to 47.8 from 46.8. Both numbers still indicate contraction, but both improve at a pace that’s slightly ahead past episodes of recovering global growth. US flash manufacturing missed, coming in at 51.7 vs consensus for 52.6 and December’s 52.4, but this is also part of the forecast. The US was, by far, the most resilient global economy over the last 18 months largely due to the effects of fiscal stimulus (2018 tax overhaul) that’s expected to have diminishing impact as we roll forward. This PMI performance spread, cyclical sensitivity of International Equities and expected normalization in fund flows helps explain our ‘tactical’ (less than 12 mos) overweight to Japan, EM and the Eurozone. US equities should benefit from recovering global growth, but maybe not as much. Has the S&P 500 already discounted a future of above trend global growth? Despite its ~29% return in 2019, the SPX’s behavior since global PMIs based in October looks very similar to recent periods of global economic recovery. If global manufacturing PMI runs above trend in the timeline we expect, US equities should continue to benefit for 2-3 more quarters.