Bank of the West US Outlook Report for April 22, 2016

US Outlook Report: Gearing Up For the Big Week Ahead


Next week will be a big one for investors. A full plate of tier-one economic indicators – from March durable goods orders to the advanced estimate of first-quarter GDP – are due to be released. If that isn’t enough to get your engine reviving, we have the April FOMC decision to provide a bit more excitement into the mix. The U.S. equity market has moved off its February lows and returned to record-high levels as somewhat better economic data out of China, a weaker dollar, and a rebound in oil prices have stoked a return to the risk-on trade. The S&P 500 is up nearly 15.0% since the February 11, 2016 low.


But in this price range, S&P 500 P/E ratios are rich by historical standards, suggesting high stock valuations  that could be setting the equity market up for disappointment, especially if Janet Yellen starts sounding a bit more hawkish in next week’s FOMC statement. Here is what to look out for next week.


Much investor attention will be given to the durable goods orders report for March released on Tuesday, given the Philadelphia Fed Business Outlook index turned down again for April and the Chicago National Activity index, a weighted average index of 85 U.S. economic indicators, was negative in February and March, and has been negative in 7 of the past 8 months. A negative reading on this measure implies that the U.S. economy is performing below its growth potential.


Investors will need to see more signs that U.S. durable goods orders are rebounding if this rally is to be sustained.  A convincing rise in durable goods orders is a leading indicator that U.S. manufacturers are indeed turning the corner.


Equities will also need to look past an ugly Real GDP print for Q1 2016, which we forecast to come in at a dower 1.0% at a seasonally adjusted annual rate. Retail sales, industrial production, and housing starts all disappointed economists’ expectations in the first quarter, setting the economy up for a disappointing growth performance in the first quarter.


We do not expect any change in the Fed Fund Funds target rate at next week’s FOMC meeting and the statement will likely remain focused on the downside growth risks, yet a shift toward a more balanced assessment could be seen as a hawkish move, increasing the odds of another FOMC rate hike within the next few meetings. This would be a clear headwind to further equity market gains.


To find out more, check out this week’s US Outlook Report.

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