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The outlook for North America

Charlie Reinhard

By Charlie Reinhard

Head - NAM Investment Strategy

April 11, 2018

After a volatile month and quarter, many investors are looking forward to what should be a strong Q1 2018 earnings season which kicks off in earnest with big bank reporting on 13 April. The Citi Private Bank Global Investment Committee (GIC) expects Q1 2018 S&P 500 EPS growth of 20% vs. Q1 2017.

 

US and global leading economic indicators, as well as our other signposts point to further growth ahead alongside favorable levels of inflation throughout most of the world.

 

In the context of current valuation readings for core stocks and bonds, two economic risks remain for investors looking ahead into 2018: First, the capacity for US growth has diminished after a long recovery which has brought the unemployment rate to its lowest level since 2000. Monetary policy is the second risk. Reduced bond purchases in Europe and a reduction in Federal Reserve bond holdings will absorb savings at a time when US fiscal policy results in additional government bond supply.

 

Interest rates may need to gradually rise to create the private sector demand to absorb additional government bond supply stemming from the recent tax cuts and in light of less aggressive bidding by central banks. As for monetary policy, we still see a proportionately muted monetary tightening cycle compared to the massive easing steps since 2008. We also note that credit generated for earlier emergency actions in 2011-2013 was successfully unwound without derailing the recovery.

 

The American Association of Individual Investors (AAII) Sentiment Survey showed a 14% jump in pessimism over the final two weeks in March, to levels last seen on 7 September 2017. The latest reading shows 31.9%% of investors are bulls (historical average is 38.5% bullish), 35.3% bears (vs historical average of 30.5%), and the rest (32.7%) are neutral. To the degree that the recovery continues and concerns about trade diminish over time, investor sentiment has room for improvement from here.

 

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