Central bank actions subvert worst-case scenarios

I'm all-in, Tony.

Canaccord Genuity U.S. Portfolio Strategist Tony Dwyer says the recent ECB action and subsequent improvement in the Euro Area sovereign debt should move all attention to the economic outlook in the U.S., Eurozone, and China. To get some perspective on the outlook for these key regions, he turns to the OECD Leading Indicators, which show sequential improvement as well as year-over-year stabilization/improvement.

  1. U.S. OECD Leading Indicator – Improving sequentially and showing a turn higher from neutral levels in the year-over-year data. This suggests better growth in the months ahead, rather than the highly feared fall-back into recession that would bring weakness in earnings;
  2. Eurozone OECD Leading Indicator – Improving on sequential basis, while the year-over-year change has “hooked” higher, albeit from levels that suggest a weak environment. The good news is that both sequential and annual data is trending better;  and
  3. China OECD Leading Indicator – Showing consistent sequential improvement and stabilization in the year-over-year data.

All in, Dwyer believes the possibility of a dramatic worsening of global economic conditions has clearly held back investor interest in the U.S. equity market. This economic concern centers on the potential for dramatic slowing in the U.S., possible hard landing in China and likely Euro Area recession. With the global central banks engaged in historic accommodative monetary policy, it appears the worst-case scenarios that have been bantered about remain unlikely for the time being.

Dwyer’s 2013 SPX target remains 1650, based on 15x $110 in operating EPS. He would continue to focus additional equity commitments into his favored sectors as further evidence emerges of sustainable improvement in: 1) Consumer Sentiment; 2) Employment; 3) credit availability; and 4) Housing.

His "Overweight" sectors remain Consumer Discretionary, Information Technology, Financials and to a lesser degree Industrials.

About the Author

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx.

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