As earnings data from companies comes trickling in, it all but confirms a slowdown in the second quarter.
The U.S. economy is moving slowly at a 2.5% growth rate, but doing better than other economies around the developed world. The U.S. has been able to produce this growth in a period when the fiscal stimulus is diminishing and we’ve seen a steep increase in taxes in the first part of 2013. The real positive news, as far as the U.S. economy is concerned, is that the real estate market continues to improve.
The macroeconomic framework has not really changed in recent weeks, but what has impressed me is the bull market in financial assets. Equities have been very strong, with the S&P 500 Index breaking very important technical levels. According to some technical analysts, the target for the S&P 500 over the next 3-4 years is well over 2,000. If this occurs, it would break the consolidation trend that has been plaguing the market for the last 12 years. Along with the equity market, we are experiencing a rally in the credit markets and very low interest rates. While all three are very important to monitor, we are keeping a close eye on the behavior of Central Banks. They are currently buying almost $200 billion a month in assets from the global markets. At some point that money will end up in the hands of investors who will put it back into the market.
We believe the slowdown occurring in the U.S. may get worse with the rest of the global economies in Q2 before improving in the second half of the year. However, for the time being, we continue to enjoy very positive liquidity conditions in the market. This liquidity situation is helping to improve the balance sheets of both retail investors and the Federal Government. However, at some point the current liquidity rally needs to transition into an earnings driven rally. We believe this may start to happen in the second part of the year or the beginning of 2014.
Ten years ago when the GDP growth was at 2%, corporate earnings were contracting and that was the reason for equity markets to fall. Today we are seeing a different scenario, with GDP growing at 2%, corporations are able to defend their earnings and their margins. Eventually, we expect to see acceleration in the cycle here in the U.S. and globally, which we think will result in very significant upside. If corporate earnings are at these current levels in a weak economy, I can’t wait to see what happens when the wind is finally at their back.