CEOs Not Impressed By US Economy: YPO Survey
Taking a look at the most recent series of U.S. economic data releases, investors have good reasons to think, act or proceed in a confused manner.
For every housing statistic hitting a five-year high, we are also left to assimilate into our collective investment mindset the most recent set of exceptionally weak durable goods' orders.
How on earth can U.S. GDP increase at a hoped for 3 percent annual rate when the Conference Board U.S. Leading Indicator has a negative print and the University of Michigan index of consumer sentiment is declining? Confusing indeed.
As such, it should be no surprise to learn that the just-released YPO U.S. Global Pulse results show that the index has not meaningfully changed over the past nine months.
Recall that the YPO Global Pulse survey of more than 700 CEOs in the U.S. generates a quarterly index that is considered a forward-looking indicator of U.S. sales trends, capital expenditure plans and hiring intentions.
Unfortunately, with this U.S. confidence index stuck in a protracted holding pattern, the title of U2's song "Running to Stand Still" aptly describes the current state of the U.S. economy.
Interestingly, the recent set of conflicting and topsy-turvy economic reports leave the Federal Reserve bankers with no choice but to maintain their exceptionally loose approach to monetary policy. That's welcome news for the bullish equity crowd.
In an ironic twist, what's mediocre/turbid for the U.S. economy is constructive/supportive for the U.S. and global equity markets. Simply put, the U.S. economy is not too hot, and not too cold. We're stuck in a "Goldilocks" economic environment, if you will.
Under this fairy-tale scenario, Fed Chairman Ben Bernanke, Vice Chairman Janet Yellen, New York Fed CEO Bill Dudley and company have made it clear that Fed policy will remain loose until such time as the unemployment rate falls meaningfully (below 6.5 percent) and/or until inflation spikes above 2.5 percent. Neither of these quantitative markers is likely to be reached any time soon.
Accordingly, the Fed is pumping the U.S. economic prime at an $85 billion monthly rate. With cash yields at zero percent, and with conventional bond yields at historically low levels, stocks default into the investor's palette as being the "prettiest girl at the dance."
To be sure, "don't fight the Fed" has never made more sense. It's been four years since the March 2009 bottom of the U.S equity market and there has been a net outflow of funds from equity mutual funds and ETFs over the past four years. Imagine just how much higher the equity markets could go if investors collectively regain their enthusiasm for stocks.
Moreover, for bull markets that last this long, per S&P Capital IQ research, the average rate of return for equities in the fifth year of a bull market is 21%. That would put the S&P 500 just shy of 1,900, quite a move from the 666 the index posted four short years ago. My, how times change!
Admittedly, many of the risks present in the past four years remain in place (e.g., Europe is in a recession, China's growth rate is slowing, there is social and political unrest throughout the Middle East, the U.S debt problem continues to grow, etc.).
Nevertheless, with the S&P 500 trading at less than 14 times forward earnings (in-line with its 40-year average), with nearly 75% of U.S. large-cap companies reporting first-quarter earnings above expectations and with ample amounts of cash still on the sidelines waiting to be invested, the path of least resistance seems to be one of higher equity prices in the months ahead
Alan Zafran is a managing director at Luminous Capital, a California-based investment advisory firm.
CNBC and YPO (Young Presidents' Organization) have an exclusive editorial partnership. A key component of this partnership is regional Chief Executive Networks in the Americas, EMEA and Asia-Pacific. These networks are made up of cross-sections of YPO's unrivaled global membership of 20,000 top executives on the front lines of the economy, running companies that collectively generate $6 trillion in annual revenues and employ 15 million people in more than 120 countries.