The key message from our leading indicators is that US inflation and wages continue to turn up. This was one of our core themes for 2014 we discussed in December last year and is bearing out. Core inflation and headline inflation are positive, while wages are turning up sharply. This has implications for profit margins. Wage increases inversely lead US corporate profits by two years. We have with very high likelihood seen the peak in profit margins, and we would expect them to fall.
Profit margins in the US have hit modern-day record levels, and this has been used to help justify high equity valuations. Consensus estimates are for profit margins to remain steady, or even increase from current levels. We disagree for ironclad…
One of the points we have been emphasizing to clients in recent months is that US small caps are looking increasingly less attractive compared to large caps. Small caps have benefited from excess liquidity and a belief that as the US economy recovers, smaller companies, with their greater domestic focus, are the place to be. Yet price and valuations are making it more and more difficult to justify the trade.
One of the themes we have been tracking in the past 6 months is the slowdown in global money growth and excess liquidity. The focus on the second derivative is important here. The level of growth in liquidity and money growth indicators is decent but the annual growth rate is rolling over.
Small business confidence in the US has improved from the depth of the crisis in 2008/09, but has moved sideways in the past 12 months. A return of confidence to pre-crisis levels has been identified by many as one of the key missing components of the recovery to date. We are getting closer, but it seems that investors need to wait a bit longer.
Global growth has been well supported going into this year, and short-leading indicators had intimated this would continue into the latter part of the first quarter. However, data has become more mixed with some releases giving cause for concern. Some…
Gone are the days when financial advisory could boast the same professional stability as a well seated doctor or lawyer. Herding people through the door and offering them a standard 60/40 portfolio invested in the in-house equity and bond funds was a simple and lucrative business model but it does not work anymore. Competition and technical innovation have already changed the industry of professional personal investment advisory and it will be sure to effect radical change for years to come.
A recent piece by Ellyn Terry, an economist at the Atlanta Fed, provides important evidence and information on the drivers of the decline in the US labour force participation rate. The interesting aspect of this small study is that it breaks down the drivers on age groups which allows us to get a much closer look at the recent trends in the US labour force participation rate
The last seven months have seen an impressive improvement in US manufacturing. Almost all components of US manufacturing have been growing strongly and the US ISM has staged an impressive comeback from sub-50 in May last year to 57 in December. However, our growth diffusion index now implies the potential for short-term disappointment.