Viewpoints
Adjust your sail

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Yana S. Barton, CFACo-Director of Growth Equity, Eaton Vance Management

      "The pessimist complains about the wind. The optimist expects it to change. The realist adjusts the sail."
      - William A. Ward

      Boston - Major equity indexes continue their ascent higher, almost ridiculing investor angst over relentless geopolitical and macroeconomic uncertainty. As we see it, global GDP growth is slowing, and although the U.S. economic picture is mixed, the risk of a recession is not imminent. While these uncertainties might persist, stock-picking opportunities remain.

      Base case: no recession

      Ned Davis Research (NDR) tracks countless macroeconomic data points and has constructed a model for early signs of recession based on 10 key indicators. When at least half of these indicators reach recessionary levels, NDR calls for an economic downturn. Currently, though consumer data remains strong, manufacturing and management sentiment indicators have deteriorated - in fact, the CEO Confidence Index is the only one of NDR's 10 indicators that has reached a key recession level. The combined result of their current reading assigns less than a 5% likelihood to a recession in the U.S.

      U.S. recession probability currently at less than 5%
      Ned Davis Research U.S. Recession Probability Model as of July 31, 2019NDRchartfromYana

      While we're still in an economic expansion that's the longest on record,1 it's not the strongest. GDP growth since June 2009, when this recovery officially started, has been running well below the pace of other postwar economic revivals,2 averaging about 2.3% per annum - compared to 4.4% averaged over the previous 10 post-war economic expansions.3 So the way we see it, the length alone shouldn't dictate the end of the cycle.

      Throughout this 10-year period, however, the markets have come to rely on central banks around the world to prop up their economies. Last week's testimony from outgoing European Central Bank (ECB) President Draghi reflected quite a downbeat outlook. Certainly that has given further credibility to the perception of limited growth opportunities available to investors across the board. Growth continues to be in limited supply. Current earnings and cash flow yields on the S&P 500 Index remain attractive on a standalone basis - and particularly when compared to 10-year Treasury yields.

      Shocks by definition are unpredictable. Last weekend's attack on Saudi oil infrastructure was the most recent reminder of that. Staying invested, diversified and selective continues to be prudent.

      Earnings: no growth?

      Now, just days away from the start of third-quarter earnings season, expectations are for a decline of 4% year over year,4 which would mark the third consecutive quarterly drop. Taking a step back to the beginning of 2019, we fully expected the first half to be weak, given the difficult comparisons relative to strong tax cut-induced earnings in early 2018, although we anticipated earnings improvement in the second half as we moved past those tough comps. The hoped-for recovery hasn't come to fruition, and it looks like expectations for the fourth quarter might prove too optimistic.

      That being said, the numbers reflect the average blended growth rate for the S&P 500. It's important not to lose sight of the outliers within the aggregates. There are stocks of companies with positive revenue and earnings growth, which can outpace the market, sector and industry averages. So in our view, selectivity is key.

      Bottom line: We believe equities, as an asset class, continue to offer attractive value and growth prospects for long-term investors. Earnings at the market level may be challenged by mixed economic prospects, so "adjusting your sail" is appropriate, but we still see plenty of opportunities for investors who can be patient and selective.