Our Macro team has been bullish on U.S. growth stocks for over nine months now. Our contrarian call continues to be that the U.S. economy is accelerating. We think that the third quarter could have the fastest headline GDP growth since the second quarter of 2014.
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"This isn’t exactly rocket science. The reality is if you do the work and get the trend in both growth and corporate profits right, you’ll get a lot of other big things in macro right. On that score, here’s the quick takeaway: our proprietary predictive tracking algorithm suggests we’ve already entered what’s historically been the best environment for U.S. stocks, a period when U.S. growth heats up and inflation is slowing down." –CEO Keith McCullough, Investopedia (4/4/2017) |
1. U.S. Economic Growth Accelerating
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"I’m going to stay with the process instead of reacting emotionally to someone’s editorial tweets. If the growth and inflation data continues to accelerate, I’ll be long higher beta equity sectors and underweight the #GrowthSlowing ones." –CEO Keith McCullough, Early Look (1/17/2017) |
The acceleration in U.S. growth has been a core tenet of our bullish thesis on U.S. stocks. The supporting evidence keeps coming in.
The headline quarter-over-quarter Q2 GDP report was revised up to 3% today (up 40 basis points). The year-over-year figure (the less volatile measure that better reveals the big picture) is what you want to watch. On that score, here's the latest. GDP was accelerated to 2.2% year-over-year from the low of 1.2% hit in the second quarter of 2016.
2. Corporate Profits Accelerating
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"If you have any friends who just want reasons to be bullish, tell them that I’m signaling BUY on both the Nasdaq’s QQQs and Biotech (IBB) this morning but to stop reading right here. Just say something like ‘KM wants to make December great again.’" –CEO Keith McCullough, Early Look (12/2/2016) |
Another key component of our bullish thesis has been Corporate Profits reaccelerating. That's exactly what's happening in the second quarter after five straight quarters of negative profit growth from the third quarter of 2015 to the third quarter of 2016.
3. INFLATION SLOWING
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"Falling inflation factors importantly into our call on U.S. growth. If headline, nominal growth remains flat at around 4%, but if the GDP deflator (i.e. inflation) falls from 2% to 1%, that pushes real GDP growth up to 3%. We’re seeing this in the numbers." –CEO Keith McCullough, Investopedia (8/29/2017) |
The last piece of the puzzle is inflation. The government’s so-called “GDP deflator” hit its highest level in nearly three years in the first quarter of 2017 at +1.9%. It has since continued to fall (to 1.6%) alongside the Consumer Price Index (CPI) and PCE data.
The headline Consumer Price Index ticked up 10 basis points to 1.73% year-over-year in July. This was the first acceleration in 4 months, while core inflation held flat at 1.7% year over year for a third straight month. Don’t expect this apparent stabilization to hold, the comps for year-over-year inflation get increasingly tougher in the months to come.
