Nov 26, 2014 | Post by: Roman Chuyan, CFA Comments Off on Back to “Old Normal” Economy

Back to “Old Normal” Economy

November labor figures were very strong, showing that U.S. employers added 321,000 jobs, the most since Jan-2012 and better than the most optimistic projection by economists. Previously, Q3-2014 U.S. GDP growth was revised to 3.9% annualized growth rate. Combined with Q2 growth of 4.6%, the U.S. economy has now experienced the two strongest back-to-back quarters of growth in 11 years.

The term “new normal” was coined by Mohamed El-Erian, then-CEO of Pimco, to describe the U.S. economy after the financial crisis characterized by sluggish economic growth of about 2%. It has come to bear, mostly: after a stronger 2.7% rebound in the economy in 2010, real GDP grew between 1.6% and 1.7% in 2011 and 2012. However, growth accelerated to 3.2% in 2013, and after the extreme weather-driven contraction in Q1, back to even stronger growth in Q2 and Q3. We are no longer in a “new-normal,” or “new neutral” economic environment – in my view, we are back to a strong, “Old-Normal” economy.

We at Model Capital believe that fundamentals drive markets, not geopolitics or technical indicators. Fundamental economic data that’s important for equities, has been quite strong this year. For example, in the past 40 years, jobless claims were as low as they are now only ONCE, in 1999-2000. Corporate earnings growth was strong, above 7.5% YoY in the past two quarters. Global liquidity continues to keep interest rates low, thus supporting economic activity and asset prices.

Based on fundamentals, our tactical asset allocation model’s return forecasts for U.S. equities generally stayed high this year, that dictated that we keep all our tactical investment portfolios in risk-on stance. Sure enough, the S&P 500 (ETFs: SPY, IVV) has now regained all ground lost in the steep October selloff, reaching new all-time highs for a YTD return of 14%.


Model Capital Management LLC is a tactical investment manager. Please review the following pages for more information on Model Capital’s approach to tactical investment management and our tactical investment strategies.

Comments are closed.

Google+