The tentative signs of recovery that the US economy had displayed in March and April faded as manuf...
The tentative signs of recovery that the US economy had displayed in March and April faded as manufacturing and services surveys disappointed. GDP growth of 1.6% was lower than expected and extreme weather conditions, a high level of terrorist alert and uncertainty over an impending war took their toll.
Current visibility on the economy is poor and and upcoming data will be key as it is our first look at economic trends post the war. Consumer confidence has already shown some rebound but manufacturing orders have yet to show improvement.
In early 2000 when the market peaked, the economic data remained strong for quite some time and equities actually proved to be a good lead indicator of the economy.
We are not dismissing the prospect that the same may true now. The fiscal stimulus plan due to be approved in late May should help economic recovery. Having passed the largest tax cut in US history in 2001, President Bush is now pushing for the second largest.
His proposals call for faster reductions on top income tax rates, expanded deductions for small businesses and an end to taxes on dividend income. While the final bill is likely to be considerably smaller than the initial proposal it will still represent incremental growth for the economy as we approach the 2004 election year.
Its impact will be muted however, by potential tax increases at the state level.
Lower energy prices compared to a year ago and interest rates still at 40-year lows should help the consumer. The key for consumer spending growth though will be job creation and this will happen only if we see a pick up in corporate spending.
We believe the corporate bond market is the greatest source of potential upside to the equity market and the economy. The narrowing of spreads not only lowers the cost of capital but could spur corporate activity.
Ultimately, capital spending levels will be dictated by corporate profitability. Over the last three years almost all sectors of the US economy have invested at a rate less than their depreciation. Improving cashflow has been directed to paying down debt. While we expect capital spending trends to improve, we also expect this to be at a slow pace ' particularly in IT spending. There are encouraging signs for profitability with first quarter earnings rising 13% and beating expectations set at the start of the year.
In the short term we expect economic data to be very mixed but earnings expectations for 6.3% growth in the second quarter look achievable so the traditional 'pre-announcement' season is likely to be light.
A risk is quantifying the impact of Sars on growth in Asia and on the manufacturing supply chain.
The recent 20% gain has led the equity market to run ahead of the economy. It is difficult to see further meaningful gains being made without some more tangible evidence of a pick-up. While a near term pullback is likely, valuations relative to the bond market remain attractive and fiscal and monetary policies supportive.
Fiscal stimulus will help consumers.
Balance sheets being repaired.
Corporate earnings aided by weaker dollar.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress