March economic data and the markets

In this week’s video update:

  • What the latest U.S. economic numbers might mean for U.S. GDP in 2017.
  • Why it might be worthwhile to be underweight U.S. equities.
  • How political risk might be overblown in European markets right now.

On this week’s episode of Market Week in Review, Senior Quantitative Investment Strategy Analyst Kara Ng joins Todd LaFountaine program director, advisor insights, as they discuss the week’s market activity.

U.S. economic data released
First, Ng notes that the new U.S. jobs non-farm payroll figure of 98,000 was down significantly compared to the prior nine months. However, rather than being dismayed by this latest number, she believes that the figure reflects weather-related noise due to abnormally warm weather in January and February and its impact on hiring.

When looking at the jobs figure as a potential economic growth indicator, Ng believes it is important to concentrate on the three-month trend. The trend is still healthy but moderate as we continue to head towards full employment in the U.S.

The latest U.S. business survey was also released this week, showing that business confidence is slightly moderating with an implied GDP down to about 2.5% - 3% versus prior months’ indication of potentially over 3%. Our investment strategy team usually prefers to focus on survey data because it is forward looking with a relatively good track record of signaling GDP growth in the past.

However, Ng points out that over the first quarter of 2017 there has been a strong disconnect between such soft survey data about business sentiment and hard economic data reflecting business performance. According to “hard” or quantitative economic data available at the beginning of Q2 2017, U.S. GDP growth for the first quarter is only tracking at about 1% so far.

Why is there a disconnect between sentiment and the numbers?

In Ng’s view, it may be related to anticipated pro-growth U.S. economic policies, like tax reform from the new Trump administration. Judging by the number of new loans taken by business, it appears that many are waiting to invest until after potential tax reforms become reality.

These factors are why our investment strategists believe the U.S. economy may be set up to be “resilient but mediocre” in 2017, as noted in our latest Global Market Outlook – Q2 Update. Our investment strategists believe that U.S. GDP growth is likely to hover around 2% this year, as businesses are waiting to invest and consumers are waiting to spend.

Ng believes that this situation means the upside for U.S. equities may be limited, especially as they are already relatively expensive. Hence, as noted in our recent report, our investment strategists are generally underweight U.S. equities and overweight for the rest of the world.

A look at European equities

Next, Ng discusses data out this week that supports our investment strategists’ view favoring European equities based on attractive valuations and strong economic fundamentals. This week’s European data included rising retail sales figures and improved unemployment numbers.

In her view, these improvements are not strong enough to cause any overheating in the labor market or problems for corporations in the region. European business surveys are also strong and at six-year highs. Ng further points out shifts in the upcoming French presidential election that may indicate a potentially more favorable outcome for the eurozone (assuming the winner prefers to keep France in the European Union).

This recent shift in France may mean that risks currently factored into European markets may be somewhat overblown. Given all these factors it makes sense to Ng that European equities have been outperforming U.S. equities over the last quarter.

For more on our investment strategists’ views on the markets and economies of Europe, the U.S. and other regions, see our latest Global Market Outlook Q2 Update report.


Note: Market Week in Review will return Friday, April 21, 2017.