The surge in optimism since November has been remarkable, as I wrote in recent reports. Consumer sentiment measures remain near their highest in 15 years (see chart), and small business confidence is near a 12-year high.
But consumer spending has not yet experienced sustained growth. While manufacturing and durable goods improved in recent months, consumption – which makes up 70% of our economy – has not seen significant improvement. After a strong 0.4% January growth, spending rose by a lower-than-expected 0.1% in February:
The S&P 500 has rallied 11% since the presidential election in the face of its already-high valuation. This implies that the market has priced-in high growth expectations. April data flow will include Q1 GDP, which may give a dose of cool reality to excited investors. In addition, I think investors might face reality check in several other areas:
Economic growth: Pro-growth policies and the pledge of 3% to 4% GDP growth put high importance on the first GDP report during President Trump’s administration. But expectations for Q1 GDP are currently weak: 1.7% by the Blue Chip consensus, and only 1.2% in Atlanta Fed’s GDP-Now estimate (see chart). If the official estimate of Q1 GDP is reported at the end of April within this range, it will likely disappoint investors. It can be dismissed as “rear view” only if the data for April and surveys for May are very strong at that time.
Inflation and European central banks: The Fed normalizing its policy has been consistent with U.S. inflation rebounding to 2%. Not so in Europe. In the Euro zone, the welcome rebound in inflation to 1% (and to 2% in the U.K.) has not yet been followed by central bank action, with most European government yields still near zero. The situation of rates below inflation benefits the highly-indebted governments, but has negative economic consequences. With few good options available, the ECB must be very careful to adjust policy to “normal, but not too normal.”
Global risks: The French election and Greece’s numbers make me think that Europe might increasingly dominate financial news as the weather gets warmer – possibly interrupted by events in Latin America.
Disclosures: Roman Chuyan is the president and general partner of Model Capital Management LLC, a Registered Investment Adviser. This article is for informational purposes only. There are risks involved in investing, including loss of principal. Roman Chuyan makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Model Capital Management LLC. There is no guarantee that the goals of the strategies discussed in this article will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any security.