U.S. Equities: Few Signs Of A Sales Or Profit Rebound

Policy uncertainty will remain elevated, putting upward pressure on risk premiums. The upside of uncertainty is that monetary and perhaps even fiscal policy will be looser than otherwise would be the case. That is a plus for stocks, but may cushion downside risks more so than propel capital appreciation in the absence of stronger global growth.


Deficient global aggregate final demand remains the defining characteristic of the global economy, given high debt loads and ongoing private sector deleveraging in the developed world. The developing world may need to undergo a similar fate. Policy is already extremely easy, but has been unable to spur much growth. Global trade remains very weak.

U.S. companies are already having difficulty generating sales growth. Inflation expectations have plunged, and are an excellent leading indicator for actual corporate sector pricing power.

Any additional U.S. dollar strength would amount to a tightening in global financial conditions, importing deflationary pressures into the U.S. and dampening top-line prospects.

In turn, that would prolong the retrenchment period required to right-size the cost structure of many businesses, especially in the face of the recent increase in labor costs. It is no wonder our profit model cannot gain any traction.

As a result, the Brexit vote does not alter our portfolio strategy, if anything, it reinforces it. Defensive sectors had been outperforming prior to the referendum in response to an increasingly shaky global economic outlook.

Strategy Outlook Third Quarter 2016

Our Global Investment Strategy service recently published their Q3 Strategy Outlook, which discusses the major investment themes and views we see playing out for the rest of the year.

Key take aways from this quarterly report include:

  1. Global Macro Outlook: The Brexit vote was a wake-up call for policymakers across the developed world; reflate growth/wages, and reduce/reverse the surging income inequality that gave rise to this populist anti-globalization revolt or be voted out of office. This report chronicles how a global savings glut and now dearth of capital investment have been so deflationary as to drive interest rates to record lows.
  2. Credit-Sensitive Fixed Income: Maintain a neutral overall spread duration position for now. Corporate spreads may perform well as sentiment improves post-Brexit, but U.S. corporate balance sheet erosion will limit excess returns; European corporates, by contrast, will continue to benefit from the ubiquitous search for yield and ECB support.
  3. Equities: Incrementally reflationary policy in response to political uncertainty and populist pressure will boost global growth relative to expectations, which, admittedly, may remain subdued through the summer until the European growth fallout from Brexit becomes clearer.
  4. Currencies: The dollar bull market remains intact; the U.S. labor market has tightened sufficiently to expect some wage pressure to materialize, which, in conjunction with looser fiscal policy, will boost growth enough above trend to warrant moderate rate hikes that markets do not yet discount.
  5. Commodities: The cure for low commodity prices will ultimately be low commodity prices, but the prospective growth in Chinese demand for base metals is unlikely to absorb the glut of excess capacity too quickly.

To access the full report entitled “Strategy Outlook Third Quarter 2016”, please click here.