On CNBC Larry Bossidy summed up the state of the US economy stating “it’s as good as it gets…and it’s good.” Larry appeared on Thursday September 6, is the former CEO of Allied Signal and Honeywell.
The August ISM Manufacturing Index released September 4 by The Institute of Supply Management reached the highest level since 2004. According to the ISM “…the major measures of (business) activity were all higher in August….signalling expansion”. Economist Brian Westbury commented “….(the) report on activity in the manufacturing sector easily exceeded even the most optimistic forecasts”.
As of September 20, quarterly earnings (EPS) projections for the S&P 500 call for a 21.3% year-over-year increase in third quarter and 18.6% for the fourth (according to Thomson Reuters I/B/E/S). These numbers point to a deceleration from 2018s first half when S&P earnings increased by 23.2% for the first quarter and 26% for the second. S&P 400 (mid-cap) and 600 (small cap) are accelerating at a higher rate.
“Secular stagnation” was a term used to describe the US economy during the period of 2014-2016; since that earnings plateau all S&P metrics (operating earnings, EPS, revenues per share, profit margins, etc.) have moved sharply higher. For instance, forward estimates of S&P 500 operating earnings per share for 2019 are now over 50% above the level of 2014-2016. In part the tax cut has helped boost these growth rates, particularly with smaller companies; the S&P 600 (small cap) projected 2019 operating earnings per share is 65% ahead of the level just three to four years ago.
The good economic news has translated into record highs of the popular equity indecies in the US, still, the price earnings ratio (projected 12 month earnings) of the S&P stands at 16.7 times earnings, somewhat below the level of earlier this year and within a one multiple point range of the last few years.
The Federal Reserves meets on Wednesday and it’s more than likely that the federal funds rate will be lifted by another 25 basis points given the momentum of the US economy. This will be the eight increase since December of 2015 when the Fed raised rates from near zero. More increases may occur later in 2018 and in 2019. We will know more about the latter after the Fed meeting.
The US Treasury 10 year yield currently stands close to 3.1%; the treasury yield curve thusly is still positively sloping but closer to inversion.
Readers of this blog should carefully examine fixed income holdings as virtually all fixed income mutual funds, ETFs and individual bonds may be currently are selling at losses if they were purchased in the last five years. The loss can be treated as an asset to offset gains realized elsewhere. Re-positioning fixed income holdings should be done carefully with an eye toward duration, the lower the better, in my view.
Robert J Voccola, CFA
Chief Investment Officer