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Global Macro Strategy

July 28, 2015

Sameer Samana, CFA®, Global Quantitative Strategist

Analysis and outlook for the global economy

  • The U.S. Leading Economic Indicators Index (LEI) surprised to the upside last week.
  • This suggests that investors may have become too pessimistic and U.S. growth may be stronger than expected in the second half of 2015.

What it may mean for investors

  • We believe the economy will strengthen in the second half, driving further gains in equity markets. The recent pullback is an opportunity to maintain or add exposure to U.S. equities.

U.S. Leading Economic Indicators Begin to Accelerate

Last week’s release of the Conference Board’s U.S. Leading Economic Indicators Index (LEI) surprised the consensus expectations by coming in much stronger than anticipated. In our opinion, this suggests that investors were too pessimistic about the prospects for the U.S. economy and the data may help to shift the negative sentiment. The leading indicators have historically led broader measures of economic growth, such as gross domestic product (GDP), and the latest data release reinforces our outlook for stronger growth in the second half. Yet, the recent decline in U.S. equities is at odds with the improving fundamentals. We think the recent pullback represents an opportunity for long-term investors to maintain or add exposure in line with recommended allocations.

Chart 1. Uptick in leading indicators bodes well for economic growth in the second half
 Chart 1. Uptick in leading indicators bodes well for economic growth in the second half
Sources: Bloomberg, Wells Fargo Investment Institute
Data sample: LEI, quarterly from June 30, 1995 to June 30, 2015; GDP, quarterly from June 30, 1995 to March 31, 2015

A consensus of analysts polled by Bloomberg expected last week’s LEI to come in at 0.3 percent, on a month-over-month basis. The actual growth turned out to be twice as large (0.6 percent) than anticipated, and the previous month’s release was revised higher from 0.7 percent to 0.8 percent. The stronger growth trajectory was mainly driven by a steeper yield curve, which tends to occur prior to economic expansions, coupled with a large gain in building permits. In fact, the increase in building permits over the last three months is the highest it has been in three decades. Such an expansion is supported by greater confidence among homebuilders. Today, many homebuilders are seeing a stronger labor market—as demonstrated by initial jobless claims at 40-year lows and the recent firming in wage growth—and improving consumer confidence, as early signs of future demand.

The optimism among homebuilders should have spillover effects as additional home buying and household formation help drive the need for goods and services, such as home furnishings, renovations, and childcare. The higher level of activity foreshadowed by the leading indicators, combined with the still-low levels of inflation and interest rates, leads us to maintain our constructive second-half outlook for U.S. equities. We are not deterred by the possibility of a fed funds rate hike, which we expect to happen in September or December, as it would imply that the Federal Reserve has confidence that the U.S. economy has reached a self-sustaining pace. The recent decline in U.S. equities belies this upcoming improvement, and we believe investors should take advantage of the divergence by adding to or maintaining exposure to U.S. equites.

Sameer SamanaAbout Sameer Samana

Sameer Samana is a global strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

Mr. Samana produces investment advice for the international, commodities, and currencies markets. Prior to joining the international strategy team in 2011, he served in a variety of roles including portfolio manager for the equity portion of Compass ETF portfolios and fixed income trader. He has more than 10 years of experience in financial services.

He earned a Bachelor of Arts in Business Administration with a concentration in Finance from Rhodes College and is a CFA® charterholder. Mr. Samana is located in St. Louis, Missouri.

*As of Sept. 30, 2014

Risk Factors

Equity securities are subject to market risk which means their values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Disclaimers

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