Post-Election Optimism Yet to Be Realized?

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

In the aftermath of the election, consumers, small businesses, and corporate CEOs signaled rising optimism about the economic outlook, likely driven by expectations of deregulation, tax reform, and infrastructure investments. Naturally, this led to speculation that growth would soon pick up significantly. However, “hard” economic data has yet to show such acceleration, with a growth pace of only 1.2% in Q1 GDP.

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Sources: Thomson Reuters Datastream, NFIB, and New York Life Investments, May 2017. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

Nonetheless, S&P 500 Index earnings reports for Q1 were solid, with 75% of companies beating estimates. The overall earnings growth rate is close to 14%, a six-year high, and importantly, revenue growth is picking up. Moreover, economic indicators point to a solid rebound in Q2 growth, with unemployment falling to a 16-year low in May, rising new orders in manufacturing, decent consumer spending, and incomes in March and April.

While the U.S. is picking up in Q2, the world economy is no longer flying on just one engine. With improving economic indicators in Europe and Japan, it’s worthwhile to look beyond U.S. equities. And after years of outperformance for U.S. equities, which from December 2007 – April 2017 amounted to 6-7% per year relative to international developed equity markets, U.S. equities now trade at a significant premium, relative to other developed equity markets (see chart below).

The forward P/E Ratio for the S&P 500 Index is 17.7, 15% above its 30-year average, while the forward P/E Ratio for the FTSE World Ex. U.S. Index reads only 14.4, 11% below its 30-year average. In addition, both the euro and the Japanese yen are undervalued vs. the dollar, which helps exporters gain market share.

There is a value case for investing in international equities.

Valuations Look Attractive Outside of the U.S.

Source: Thomson Reuters Datastream, as of 5/30/17. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

International investment is a good way to diversify a portfolio. If you are concerned about the currency risk associated with international investing, a 50% hedge may be worth considering in an environment where shifts in the global growth picture and central bank policies may pull the dollar in either direction.

The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors.

Foreign securities may be subject to greater risk than domestic investing. These may include securities markets that are less efficient, less liquid, and more volatile than those in the United States, as well as foreign currency fluctuations and different governmental regulatory concerns.

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

FTSE World Ex-U.S. Index includes approximately 2,200 stocks of companies in 46 countries, from both developed and emerging markets around the world.

NFIB Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.

The S&P 500 Index is defined as an index of 500 stocks chosen for market size, liquidity and industry grouping and is designed to be a leading indicator of U.S. equities and reflect the risk/return characteristics of a large cap universe.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

Forward price to earnings (forward P/E) is a measure of the price-to-earnings (P/E) ratio using forecasted earnings for the P/E calculation.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group

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