US ECONOMY

CONSUMER HEALTH

VERY POSITIVE

The consumer has been the bedrock of the US economy through much of the current expansion and we have seen little to suggest that this cannot continue.

CORPORATE EARNINGS

NEUTRAL

Corporate earnings growth was weak throughout 2019 as a result of slowing in the global economy and trade policy uncertainty. However, analysts are expecting mid to high single digit earnings growth in 2020, which will be important to sustaining recent levels of equity returns.

EMPLOYMENT

VERY POSITIVE

December’s headline jobs growth number of 145,000 missed consensus expectations, though the unemployment rate remained stable at 3.5%; a 50-year low. Despite the softer than anticipated results in December 2019 was an incredibly strong year for the labor market, and it remains the healthiest area of the economy.

INFLATION

POSITIVE

Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

FISCAL POLICY

POSITIVE

The Tax Cuts and Jobs Act of 2017 lowered the effective tax rates for many individuals and corporations. We view the cuts as a tailwind for economic activity over the next several years.

MONETARY POLICY

POSITIVE

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, it is unlikely that changes in Fed Policy will disrupt the economic cycle in the near future. Furthermore, the low absolute level of interest rates remains a positive for markets.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

NEUTRAL

We see the possibility for short-term spikes in volatility as a result of tensions between the US and Iran, but do not believe that these risks rise to a level that could undermine economic output. We also view recent progress toward a trade agreement between the US and China as a positive development for the global economy.

ECONOMIC RISKS

NEUTRAL

Due to low inflation and weak economic activity, central banks around the world remain in a very accomodative stance. We have seen some recent evidence of modest recovery in places like Germany, but overall we expect global economic growth to remain modest.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

B+

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, we have downgraded our Fed Policies grade to a B+. The low level of interest rates remains a positive for markets, but sentiment will likely no longer be aided by anticipated rate cuts.

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

December’s headline jobs growth number of 145,000 missed consensus expectations, though the unemployment rate remained stable at 3.5%; a 50-year low. Despite the softer than anticipated results in December 2019 was an incredibly strong year for the labor market, and it remains the healthiest area of the economy.

INFLATION

A

Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

We have raised our International Risks metric to a 7 following the US airstrike which killed Iranian General Qassem Soleimani. We expect heightened volatility in markets as a result of the further escalation of tensions that this action represents. However, we stress that volatility stemming from geopolitical events tends to be short-term.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

B+

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, we have downgraded our Fed Policies grade to a B+. The low level of interest rates remains a positive for markets, but sentiment will likely no longer be aided by anticipated rate cuts.

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

December’s headline jobs growth number of 312,000 handily beat consensus estimates yet again and provided further evidence that the US consumer remains in a strong position to continue fueling the expansion.

INFLATION

A

Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

We have raised our International Risks metric to a 7 following the US airstrike which killed Iranian General Qassem Soleimani. We expect heightened volatility in markets as a result of the further escalation of tensions that this action represents. However, we stress that volatility stemming from geopolitical events tends to be short-term.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

B+

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, we have downgraded our Fed Policies grade to a B+. The low level of interest rates remains a positive for markets but sentiment will likely no longer be aided by anticipated rate cuts.

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

November’s headline jobs growth number of 266,000 smashed consensus estimates and provided further evidence that the US economy remains on solid footing.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

6

Following progress made on two key geopolitical concerns (Brexit and US/China trade relations), we are reducing our International Risks metric to a 6. Other key areas of focus for markets include the rising economic nationalism around the globe and escalating tensions in the Middle East.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

B+

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, we have downgraded our Fed Policies grade to a B+. The low level of interest rates remains a positive for markets but sentiment will no longer be aided by anticipated rate cuts.

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

November’s headline jobs growth number of 266,000 smashed consensus estimates and provided further evidence that the US economy remains on solid footing.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

6

Following progress made last week on two key geopolitical concerns (Brexit and US/China trade relations), we are reducing our International Risks metric to a 6. Other key areas of focus for markets include the rising economic nationalism around the globe and escalating tensions in the Middle East.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

A-

The Federal Reserve cut its interest rate target three times during 2019, but projections in the Fed’s “Dot Plot” following its most recent meeting yielded, on balance, no changes in 2020. We expect this to remain the case moving forward until we see a meaningful shift in the economic data (either positive or negative).

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

November’s headline jobs growth number of 266,000 smashed consensus estimates and provided further evidence that the US economy remains on solid footing.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

6

Following progress made last week on two key geopolitical concerns (Brexit and US/China trade relations), we are reducing our International Risks metric to a 6. Other key areas of focus for markets include the rising economic nationalism around the globe and escalating tensions in the Middle East.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

A-

The Federal Reserve cut its interest rate target three times during 2019, but Chairman Jerome Powell signaled to markets that the most recent cut may be the last adjustment to the Fed’s policy target until there is a meaningful shift in the economic data (either positive or negative).

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

November’s headline jobs growth number of 266,000 smashed consensus estimates and provided further evidence that the US economy remains on solid footing.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Despite the US & China being close to a “Phase One” agreement, we are keeping our “international risks” metric at an elevated level of 7 for now. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

A-

The Federal Reserve cut its interest rate target three times during 2019, but Chairman Jerome Powell signaled to markets that the most recent cut may be the last adjustment to the Fed’s policy target until there is a meaningful shift in the economic data (either positive or negative).

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

The US economy added a healthy 128,000 new jobs in October. Furthermore, there were upward revisions to data from the September and August reports in addition to evidence of strong wage growth. Considering the slew of negative sentiment leading up to its release, this was one of the more uplifting release in recent memory.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Despite the US & China being close to a “Phase One” agreement, we are keeping our “international risks” metric at an elevated level of 7 for now. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, but we will be watching this metric closely over the next couple of weeks and throughout earnings season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

A-

The Federal Reserve cut its interest rate target by an additional 25 bps last month. This was the third cut this year, but Chairman Jerome Powell signaled to markets that we this may be the last adjustment to the Fed’s policy target until there is a meaningful shift in the economic data (either positive or negative).

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

The US economy added a healthy 128,000 new jobs in October. Furthermore, there were upward revisions to data from the September and August reports in addition to evidence of strong wage growth. Considering the slew of negative sentiment leading up to its release, this was one of the more uplifting release in recent memory.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Despite the US & China being close to a “Phase One” agreement, we are keeping our “international risks” metric at an elevated level of 7 for now. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.

CONSUMER SPENDING

A

Our consumer spending grade remains an A despite a recent decline in retail sales numbers. US consumer confidence remains high, but we will be watching this metric closely over the next couple of weeks and throughout earnings season. The consumer has been the bedrock of the US economy through much of the current expansion.

FED POLICIES

A-

The Federal Reserve cut its interest rate target by an additional 25 bps last month. This was the third cut this year, but Chairman Jerome Powell signaled to markets that we this may be the last adjustment to the Fed’s policy target until there is a meaningful shift in the economic data (either positive or negative).

BUSINESS PROFITABILITY

B-

As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.

EMPLOYMENT

A

The US economy added a healthy 128,000 new jobs in October. Furthermore, there were upward revisions to data from the September and August reports in addition to evidence of strong wage growth. Considering the slew of negative sentiment leading up to its release, this was one of the more uplifting release in recent memory.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Despite the US & China being close to a “Phase One” agreement, we are keeping our “international risks” metric at an elevated level of 7 for now. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.