"U-S-A! U-S-A! U-S-A!"... Recognize that cheer? If you have ever watched the Olympic Games, there is no escaping it. That full-throated cheer reverberates in stadiums where a U.S. team is making a comeback or is poised to score a victory.
There are a few years yet until the next Olympic Games, but if you listened closely enough this week, you could hear "U-S-A! U-S-A! U-S-A!" reverberate across the capital markets.
That was the case partly because the U.S. economy is making a comeback from a place it never went and partly because it was evident that the U.S. is still snatching victory from the jaws of foreign economic defeat.
A Euro Slump
Stock prices went up, with the S&P 500 and Nasdaq Composite both setting new record closing highs on Tuesday (and again on Friday); the U.S. Dollar Index went up, hitting a two-year high on Thursday; and Treasury prices went up across the curve (driving yields lower), despite $113 billion of new supply hitting the market.
Arguably, the most notable mover of the week wasn't a U.S. asset. That distinction goes to the euro, which slumped to a near two-year low alongside the outlook for Germany's business climate.
The Ifo Business Climate Index was just the latest in a series of data points out of the eurozone that made it clear economic conditions there are weak and that the ECB isn't going to be raising interest rates anytime soon.
To be fair, the Federal Reserve isn't expected to raise its policy rate anytime soon either, but the added distinction that was plain to see for market participants is that interest rates in the U.S. are at a much higher resting place than they are in the eurozone.
That is true for the policy rate and it is true for market rates. The 10-yr German bund, for instance, is yielding -0.02%, versus the 10-yr Treasury note, which is yielding 2.50%.
Buying the German bund right now means you're paying the German government to borrow your money, which is pretty messed up if you don't have to own German debt.
The latter observation is key, because the weakness in the euro, combined with the corresponding strength in the dollar and U.S. Treasuries, is a trading dynamic that points to capital flight on the part of eurozone investors who are seeking (and can seek) higher returns elsewhere.
This matters, because when capital flees, it diminishes the amount of capital that is available to invest in growth projects at home, and that lack of investment lengthens the period of economic weakness. In turn, it can lead to further currency devaluation that diminishes the purchasing power of consumers and businesses alike in the affected area.
That's not a dynamic you want to take root, as any number of emerging market nations would attest, yet the seeds have been planted with a monetary policy in the eurozone that is forcing the action.
The answer won't be an imminent rate hike from the ECB, but unless, and until, economic data out of the eurozone point to a sustained pickup, the issue of capital fleeing to pursue higher returns elsewhere, namely the U.S., is going to be a growth impediment.
There hasn't been much that has impeded the U.S. stock market in 2019, with the exception perhaps of its own stellar performance.
The idea that the stock market has moved too far, too fast, given global economic conditions, has perhaps slowed its advance in the face of what has been a better-than-expected first quarter earnings-reporting period.
Nevertheless, U.S. companies are demonstrating that their business is holding up reasonably well in the face of several headwinds that include trade uncertainty, weak economic activity in the eurozone and China, and a strong U.S. dollar.
Things aren't perfect by any means. After all, the blended first quarter EPS growth rate is still negative (-2.2%), according to FactSet.
The ongoing demand tell for U.S. businesses, however, is in the blended revenue growth rate, which sits at 5.1%. That's far slower than the 9.2% growth rate in the same period a year ago, but given the tough comparison, and the weakness abroad, it's quite respectable. Importantly, too, it flows from growth in all sectors, with the exception of information technology (-1.0%).
It's a stretch to call this reporting period undeniably good. What it has been so far is good enough to keep the bull market intact and on a comeback trail from a recession trade that ended up being more fiction than fact.
What It All Means
We suggested last week that a recession in the U.S. is inevitable. What we couldn't put our finger on is just when that recession will happen. Our argument was that 2019 would very likely be a recession-free zone.
That argument was helped on Friday when it was reported real GDP increased at a 3.2% annual rate in the first quarter, according to the advance estimate from the Bureau of Economic Analysis.
To see a '3' handle on the first quarter GDP print was a major surprise -- and an uplifting surprise. Just as helpful was the recognition that the GDP Price Deflator was up only 0.9%.
That combination reinforced the understanding that the prevailing pattern for the U.S. economy is accented with solid growth and muted inflation pressures. Granted this is a backward-looking report, yet it validated the stock market's forward-looking disposition throughout the first quarter.
That disposition involved the pricing out of an imaginary recession, and the pricing in of a continued expansion that rests on the Federal Reserve's pivot to a more dovish-minded policy stance.
The stock market has been cheering "U-S-A! U-S-A! U-S-A!" since the Fed made its pivot on January 4. For this week at least, it appeared as if there were some foreign voices joining in the cheer, because the earnings news and economic data showed the U.S.A. still has the game to back up an otherwise haughty cheer that reverberated across capital markets.