2019 Mid-Year Economic Outlook

July 16, 2019

In the U.S., there is no denying that the bull market in equities has been one for the record books.

It's the 10th anniversary of the U.S. economic expansion, and the S&P 500 index recently moved into new high territory. Yet there is still deep-seated anxiety that the bull market in equities will succumb to a slowing economy. Jim Solloway, Chief Market Strategist and Senior Portfolio Manager in our Portfolio Strategies Group, shares our expectations for the global economy and financial markets over the coming months.

Mid-year Economic Outlook

Transcript

Hello, I’m Jim Solloway, Chief Market Strategist and Senior Portfolio Manager in SEI’s Portfolio Strategies Group. Today I will share our expectations for the global economy and financial markets over the coming months.

July marks the tenth anniversary of the U.S. economic expansion. The S&P 500 Index seemed to celebrate recently by moving into new-high territory…but there is deep-seated anxiety that the bull market in equities will succumb to a slowing global economy, the lagged impact of last year’s interest-rate increases, and a worsening trade war between the U.S. and China.

We believe there is still life in the global economic expansion. That means corporate profits should continue to expand and push stock markets to higher levels in the months ahead.

In the U.S., there is no denying that the bull market in equities has been one for the record books.

Measuring from the bottom in 2009, the S&P 500 Index climbed more than 440% in cumulative total-return terms through the end of June 2019. Global equities, as measured by the MSCI ACWI Index, have followed the same path…but lagged with a cumulative total return of 300%.

U.S. and German 10-year bonds both posted cumulative total returns of just 41% and 45%, respectively, while cash equivalents have returned 6%.

Investing in riskless assets has come at an exceedingly high price. U.S. equities, in our opinion, still appear attractive, at least relative to bonds.

Comparing corporate bond yields to the earnings and cash flow yields of the S&P 500 Index shows that an unusually positive yield gap has opened up between equities and bonds since the financial crisis.

In May of this year, as stocks swooned and bond yields fell sharply, the gap widened dramatically in favor of equities. We believe these yield spreads strongly support the case for maintaining exposure to equities versus bonds, in the absence of a recession or a meltdown of investor confidence.

With that in mind, U.S.-China tariff tensions and worries about global growth have put only a modest dent in the confidence of American businesses. We think the U.S. economy should be able to weather this storm, and it helps to keep the problem in perspective.

Even if the U.S. eventually imposes a 25% tariff on all Chinese imports, total duties will amount to roughly $200 billion. That’s the equivalent of 1.0% of U.S. GDP and about 8.5% of the present total value of merchandise imports.

Even if the U.S. eventually imposes a 25% tariff on all Chinese imports, total duties will amount to roughly $200 billion. That’s the equivalent of 1.0% of U.S. GDP and about 8.5% of the present total value of merchandise imports.

Expand

Glossary of Financial Terms:
Cash flow yield: Cash flow yield is calculated by dividing cash flow per share by current stock price.
Earnings yield: Earnings yield is calculated by dividing earnings per share by current stock price.

Index Description: 

The Bloomberg Barclays German Bond 7-10 Year Index is comprised of generic German government bonds with fixed maturities between 7 and 10 years.
The Bloomberg Barclays U.S. Short Treasury Index tracks the market for treasury bills issued by the U.S. government. U.S. Treasury bills are issued in fixed maturity terms of 4-, 13-, 26- and 52-weeks. The U.S. Treasury Bill Index is a component of the U.S. Short Treasury Index along with U.S. Treasury notes and bonds that have fallen below one year to maturity.
The Bloomberg Barclays U.S. Treasury 10-Year Bond Index is a benchmark index composed of U.S. Treasury bonds designed to measure the performance of long-term maturity fixed-income securities.
The MSCI ACWI Index is a market capitalization weighted index composed of over 2,000 companies, and is representative of the market structure of developed and emerging market countries in North and South America, Europe, Africa, and the Pacific Rim.
The S&P 500 Index is a capitalization-weighted index made up of 500 widely held U.S. large-cap companies.
 

Legal Note

Disclosure:
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.
There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.

Index returns are for illustrative purposes only and do not represent actual fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated with your financial advisor.