As fallout from the Brexit vote continues to be felt—most acutely in currency and confidence—attention on this side of the pond turns to the next round of economic reports for clues as to how the U.S. economy will withstand the inevitable headwinds from the event.
From a market perspective, Brexit is best understood as an event—one that has sent the stock market down sharply and caused bond yields to plunge. Our research has shown that markets tend to recover from “events” if economic fundamentals are solid. This “if” is putting even more emphasis on upcoming data on employment, GDP, and manufacturing.
Before Brexit, our proprietary Astor Economic Index® (AEI) has shown growth in the U.S. economy, although there has been some minor slowing over the past several months. Obviously the Brexit vote, itself, has not had any fundamental effect on the economy; the process of Britain’s exit will be both complicated and prolonged. However, there have been undercurrents of concern voiced about the recent pace of U.S. economic growth, including by Federal Reserve Chair Janet Yellen in her recent testimony before Congress.
To be clear, our AEI reading has not signaled any warnings about an economic downturn or recession. The economic “arrows” have been pointing upward, although to a lesser degree than in previous months. Any significant change in the angle of those arrows going forward, indicating the economy is slowing further, would mean the market likely faces a much tougher time recovering.
Rather than dwell in the land of “what-ifs,” economic data gives concrete evidence of what is happening now, which is far more significant for the nearly $18 trillion U.S. economy than any projection. Data will help clear the uncertainty that has swirled in the wake of the Brexit vote, the results of which took many by surprise and triggered a wave of remorse, as more than 3 million British people signed an official online petition for a “do-over” vote. Amid shaken confidence, investors and business leaders alike are raising questions about a slowdown and even a possible recession in Britain, the impact on the European economy, and fears for global economy overall.
On the currency side, since the Brexit vote the British pound has come under intense pressure, as the sterling has fallen to its lowest level versus the U.S. dollar in more than three decades. The British government announcement that it has put in place “robust contingency plans” to deal with the financial aftermath of the Brexit vote thus far has done little to stop the sterling’s decline.
If the U.S. dollar resumes its rally from 2015, that could cause an additional slowdown in U.S. exports. Likewise, a strong dollar would further pressure U.S. manufacturing—which brings us to the economic data to be released starting later this week.
The manufacturing sector has been faring somewhat better since its downturn last fall and winter, with May logging the third consecutive month of growth. Whether June has continued that growth will be closely watched when the Institute for Supply Management (ISM) manufacturing report is released on Friday, July 1.
Also in the spotlight will be the Employment Situation for June, scheduled to be released on Friday July 8. The big question here is whether hiring has picked up after May’s disappointing report that showed nonfarm payroll employment increased by only 38,000. The Federal Reserve, in its decision not to increase rates at its June meeting, has trained its sights on the employment number, as has much of the market.
Later in the month, on July 29, we will get a first look at Q2 GDP with an advance reading for the quarter. This will be eagerly awaited given the slowdown in Q1 to 1.1%, the weakest pace in a year. While slow, Q1 output was raised from earlier readings for the quarter of 0.5% (advance) and then 0.8% (second estimate).
Amid the uncertainty and speculation about various “what-if” scenarios—from whether the British will have a “re-do” vote, to whether there will be other “exit” referenda in the EU—economic data provide the proverbial ground to stand on. That’s why our investment philosophy is grounded in assessment of economic fundamentals, to determine the appropriate weighting of risk assets (i.e. equities) within a portfolio given the current state of the economy. It makes far more sense in our view to deal in the reality of economic fundamentals than to rely on projections of what might occur, when and how.
Rob Stein is the CEO of Astor Investment Management LLC, a registered investment advisor that provides advisory services to approximately $1.9 billion (as of March 2016) in client assets across various product channels, including separately managed accounts, mutual funds, and model delivery arrangements. Astor’s investment philosophy is based on the belief that diligent analysis of economic data can provide valuable signals for longer-term financial market allocations.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.