Last week’s scarily good macro and earnings data revealed solid foundations for reflation.

With Halloween falling last Tuesday, we might have expected a week of scary economic data. In actuality, it was scarily good. When our Asset Allocation Committee met two months ago, it anticipated a consolidation of synchronized global growth and investor optimism, with potential reflationary surprise to the upside. Did last week’s upbeat data bring us there?

Holiday Fun

We opened with U.S. third-quarter real GDP growth at 3.0% annualized (a robust 5.2% nominal), and while the bounce-back from the hurricane season was not as strong as many had hoped, we still closed the week with 261,000 extra non-farm jobs and another tick down in unemployment, to just 4.1%. On the morning after Halloween, the Atlanta Fed’s “GDPNow” model forecast 4.5% annualized growth for the fourth quarter.

And the treats kept on coming, with news that personal spending is growing faster than at any time since the financial crisis, and the Conference Board’s Consumer Confidence Index approaching its highest levels this century.

Europe joined in the holiday fun. The EU booked its fastest rate of GDP growth in six years, at 2.5% annualized, and also beat expectations on unemployment. Last Monday, the European Commission’s Economic Confidence Index hit its highest level since January 2001.

Industry is humming. The Dallas Fed’s Texas Manufacturing Outlook Survey for October posted an 11-year high number, and the Chicago Business Barometer hit a six-year high. The Institute for Supply Management’s U.S. Manufacturing PMI remained close to its 13-year high, with 16 out of 18 industries expanding.

In the Eurozone, October’s year-over-year performance by the IHS Markit Manufacturing PMI was the best of this century, and the best ever for jobs creation. Even in China, where post-Party Congress moderation is expected due to the greater focus on the quality of growth rather than its rate, last week’s Caixin Manufacturing PMI data remained steady and positive.

We were also treated to dovish signals from the European Central Bank’s QE taper program and the Bank of Japan’s decision to maintain its current loose monetary policy, even as the Bank of England delivered its first, tentative rate hike in a decade. The week ended with Jerome Powell, the continuity candidate, appointed as the new chair of the U.S. Federal Reserve. We even kicked off the Congressional debate that could deliver tax cuts before the month is out.

No wonder Halloween marked the first time in history that the S&P 500 Index has posted a positive total return for every one of the first 10 months of the year.

The FANGs Bite Back

Were there any “tricks” among the treats?

Perhaps. The stock market “FANGs”—new technology leaders Facebook, Amazon, Netflix, Google and the like—delivered a nasty bite to our reflationary forecast.

The good macro news fit well with the views of our Asset Allocation Committee back in September—but we believed that reflation could favor a portfolio tilt toward value-oriented, cyclical and smaller companies, versus the FANG-type stocks that have led markets this year.

Halfway through third-quarter earnings season, however, the quality growth, FANG-type companies have been the stars of the S&P 500. Amazon, in particular, hit its estimates clear out of the ballpark, and on Thursday we learned that iPhone X demand helped Apple grow its earnings by 24%, year-over-year, and predict higher sales into year-end. At the same time, the industrial sector is enduring a relatively poor season, according to FactSet.

Still, these results need some context. There is no reason why the FANGs shouldn’t continue to play a role in the global growth story, even if their multiples look a little stretched. Moreover, FactSet data show the cyclically sensitive materials sector leading in terms of positive earnings surprises, followed by technology and energy. Financials have delivered some upside surprises despite hurricanes hammering insurance earnings. Overall, three quarters of U.S. companies have so far beaten third-quarter earnings estimates: Cyclicals have had less bite than the FANGs, but they’ve still had a good quarter.

One should also expect the trend to be a little messy as we move from “Goldilocks” to a more reflationary environment. The industrial sector may have lagged, but Caterpillar has delivered one of the season’s biggest upside earnings surprises, with demand expanding in every country it sells to. That is the kind of result one would expect given the trajectory of global PMIs.

In short, the FANGs’ success doesn’t suck the blood out of last week’s macro data. A deleveraging China always has the potential to be the ghost at the feast, and zombie companies may tip the credit cycle over in a couple of years, but both the macro and the corporate data from Halloween week reveal solid foundations for reflation. And by the next big holiday—Thanksgiving in the U.S. on November 23—we could be celebrating tax cuts that finally wake more cyclical companies from the dead.

In Case You Missed It

  • U.S. Personal Income & Outlays:  Personal spending increased 1.0%, income increased 0.4%, and the savings rate decreased to 3.1% in September
  • Case-Shiller Home Prices:  August home prices increased 0.4% month-over-month and increased 5.9% year-over-year (NSA); +0.5% month-over-month (SA)
  • U.S. Consumer Confidence:  +5.3 to 125.9 in October
  • ISM Manufacturing Index:  -2.1 to 58.7 in October
  • Federal Open Market Committee Meeting:  The Fed left short-term interest rates unchanged and maintained positive language on the economy
  • U.S. Employment Report:  Nonfarm payrolls increased by 261,000 and the unemployment rate fell to 4.1% in October
  • ISM Non-Manufacturing Index:  +0.3 to 60.1 in October

What to Watch For

  • Monday, 11/6:
    • Eurozone Producer Price Index
  • Tuesday, 11/7:
    • Eurozone Retail Sales
    • U.S. Consumer Credit
    • U.S. JOLTS Job Openings

– Andrew White, Investment Strategy Group

Statistics on the Current State of the Market – as of November 3, 2017

Market Index WTD MTD YTD
S&P 500 Index 0.3% 0.5% 17.5%
Russell 1000 Index 0.3% 0.5% 17.3%
Russell 1000 Growth Index 0.7% 0.6% 26.1%
Russell 1000 Value Index -0.1% 0.4% 9.1%
Russell 2000 Index -0.9% -0.5% 11.3%
MSCI World Index 0.6% 0.4% 19.3%
MSCI EAFE Index 0.9% 0.3% 22.7%
MSCI Emerging Markets Index 1.5% 0.6% 33.5%
STOXX Europe 600 1.0% 0.0% 23.7%
FTSE 100 Index 0.8% 0.9% 9.5%
TOPIX 1.3% 1.6% 20.5%
CSI 300 Index -0.7% -0.3% 23.1%
Fixed Income & Currency      
Citigroup 2-Year Treasury Index 0.0% 0.0% 0.4%
Citigroup 10-Year Treasury Index 0.8% 0.3% 2.4%
Bloomberg Barclays Municipal Bond Index 0.2% 0.1% 5.0%
Bloomberg Barclays US Aggregate Bond Index 0.4% 0.2% 3.4%
Bloomberg Barclays Global Aggregate Index 0.4% -0.1% 5.8%
S&P/LSTA U.S. Leveraged Loan 100 Index 0.0% 0.0% 2.9%
BofA Merrill Lynch U.S. High Yield Index 0.1% 0.0% 7.4%
BofA Merrill Lynch Global High Yield Index 0.1% -0.1% 9.6%
JP Morgan EMBI Global Diversified Index 0.1% -0.2% 9.2%
JP Morgan GBI-EM Global Diversified Index -0.4% -0.6% 10.4%
U.S. Dollar per British Pounds -0.3% -1.6% 5.8%
U.S. Dollar per Euro 0.3% -0.3% 10.1%
U.S. Dollar per Japanese Yen -0.4% -0.5% 2.1%
Real & Alternative Assets      
Alerian MLP Index 0.8% 0.2% -9.3%
FTSE EPRA/NAREIT North America Index 0.8% 1.0% 2.4%
FTSE EPRA/NAREIT Global Index 0.9% 0.7% 11.1%
Bloomberg Commodity Index 1.2% 0.8% 0.0%
Gold (NYM $/ozt) Continuous Future -0.2% -0.1% 10.2%
Crude Oil (NYM $/bbl) Continuous Future 3.2% 2.3% 3.6%

Source: FactSet, Neuberger Berman.