Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
Articles from Robert Hughes
According to data from FactSet, more than 80 percent of the companies in the S&P 500 have reported first quarter earnings through this morning. Overall, earnings reports have been better than expected, with almost 72 percent beating analyst expectations. Despite the beats, earnings growth overall remains negative, with reported earnings per share down about 7.8 percent from a year ago.
Here at AIER, we predict recessions based on our time-tested, data-dependent Business-Cycle Conditions model. Our April report, which we are releasing today, shows a decline to 38 in our index of Leaders, its first drop below the neutral 50 level in 110 months.
We should take notice. But why did it drop?
Alcoa’s earnings report is typically considered the unofficial start of earnings reporting season. The company is due to deliver results today after the U.S. equity market closes. However, according to data compiled by Factset, 22, or 4.4 percent, of the 505 companies that are currently part of the S&P 500 have already reported first quarter earnings.
The economic outlook is modestly upbeat, but rife with risks. As we approach the seventh anniversary of the end of the worst recession since the Great Depression, the economy has made substantial progress. There are reasons to believe that later this year businesses could feel more confidence in hiring and making other investments. But obstacles remain.
Wages – average hourly earnings – rose a decent 0.3 percent in January for production and nonsupervisory workers, and an even more impressive 0.5 percent for all workers. Both are up 2.5 percent from a year ago, about as strong a gain as we’ve seen in the current expansion, but well below the peak rates of about 4 percent per year in prior expansions.
But that’s only part of the story.
Although the economy and the stock market are very different entities, they can and do intersect. Their health rely on some of the same fundamentals. Short-term stock market fluctuations, including the recent double-digit percentage plunge, are difficult to fully explain and even more difficult to predict. However, over time, equity markets tend to be driven by fundamentals – sales, margins, and earnings.
This institute has long been known for its work in identifying turning points in the economy, including predicting recessions. And we have a pretty good track record in that regard since we started studying business cycles in 1953. But such work requires vigilance, and changing with the times as necessary.
It’s been said that the only constant in life is change. That idea certainly holds true for economies. Research at AIER is based on sound economic theory and backed by empirical analysis. The same combination of theory and empirical study is the foundation of our Business-Cycle Conditions model. In simple terms, our model is a set of economic indicators combined in a way that anticipates turning points in a business cycle. We stress that our use of the statistical indicators is only one of the tools available to help forecast the near-future, cyclical trend of business activity.
A blowout October Employment Report suggests the economy has regained momentum just in time for the holiday shopping season. Strong numbers across the board in the report sharply raises the likelihood of a Fed rate increase in December. However, one report does not necessarily mean the economy has moved to a significantly stronger growth trend. Growth is still likely to be moderate by historical standards, implying occasional periods of mixed economic reports may occur at times. These periods of mixed data will likely prompt the Fed to remain cautious during the process of policy normalization, implementing future rate hikes only at a very gradual pace.
The Fed will no doubt be looking carefully at data for August, including the upcoming Employment Situation report, for signs that recent turmoil in the global economy and capital markets may be affecting U.S. consumer or business behavior. Judging by strong auto sales and the continued low level of layoffs, it would appear that the U.S. is weathering the late summer storm reasonably well.