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Surprise! The US Economy’s Not in Trouble

November 2017
By Nanette Abuhoff Jacobson

Nanette takes a look at stronger-than-expected economic data that shows the US economy is doing better than forecasters previously thought.

 


 

Key takeaway

The US economy has surprised to the upside in the past couple of months, defying expectations of a hurricane-induced slowdown.

 

Proof point

The Bloomberg  Economic Surprise Index in Figure 1 measures broad economic data across manufacturing, consumption, housing, and labor markets relative to market expectations. A positive reading means that data releases were stronger than expected.

 

Figure 1
Bloomberg Economic Surprise Index turns positive (12/16-11/17)
Business cycle economic data relative to expectations

MFGS_111517_1

Source: Bloomberg

 

What it means

  • The upturn suggests that recent economic data forecasts have been overly pessimistic and that the US economy is doing better than previously thought
  • With the economy gathering steam into year end, historically rich valuations could be sustained into 2018

 

Some specifics

  • Regional surveys show that manufacturing conditions and business and consumer confidence are the biggest outperformers relative to expectations. And while Texas got a particularly big boost from hurricane-related rebuilding, improvements are evident across many US states.
  • The brick-and-mortar retail sector continues to struggle under the weight of stiff competition from major e-commerce players

 

Investment Implications:

  • I favor an overweight to US equities amid continued upside, despite rich valuations
  • Although the current US expansion has been in place for several years, economic fundamentals suggest continued solid performance over the next six to 12 months
  • Given the increased likelihood of tax reform, a slight positive bump in US growth, and more attractive valuations, I favor US small-cap and mid-cap equities
Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds.

All investments are subject to risk, including the possible loss of principal.

Small- and mid-cap securities can have greater risk and volatility than large-cap securities.

The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

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