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QID: Just Right

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Executive Summary:
We believe that the market and economy are not too hot nor cold, just right. Moderate earnings and average equipment expenditure growth with low inflation should result in real GDP of 2-3%. These factors should keep the Fed from dramatically increasing rates any time soon. The environment should bode well for the markets for the foreseeable future. As noted in January, our model is predicting a 19% increase for the S&P 500 for 2019. As expected, January was strong, and February’s performance should be +/- 2%.

Earnings growth is forecasted to slow to 10% in 2019. That is well above the eight-year average earnings growth rate of 8.01%. Although the trend is down versus the prior two years, trade seems to be the biggest headwind we are facing. As we discussed last month, we expect that a trade deal will be completed by mid-year. With the pressure off trade, we believe earnings growth continues its upward path.

Exhibit1. Historical and Forecasted Earnings GrowthQID-Historical-Foreasted-Earnings-Growth-02-2019

Private fixed-investment in new equipment appears to be slowing to 5%, slightly below the 20-year historical median growth of 5.6%, see exhibit 2 below. The major pops to growth occurred just after the 2003 and 2009 recessions of 10% and 15%, respectively. Surprisingly, investment in information processing equipment’s median growth since 1999 has been just 3.4%, substantially below overall new equipment expenditures. This was well in advance of trade issues and one may wonder if this has more to do with the slow economy after the recovery from the 2003 and 2009 recessions. Or was this a reality of centralized storage to cloud computing. More recently, private spending on information processing equipment may have been delayed awaiting the switch to 5g. We keep hearing the tremendous product and service opportunities that 5g will offer. With a trade agreement in place by mid-year and the start of a movement to 5g, we are hopeful that it will be enough to rejuvenate equipment spending to long-term trend rates.

Exhibit 2. Private Fixed-Investment Growth in New Equipment

QID-Private-Fixed-Investment-Growth-Equipment

 

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