Leading Cyclical Indicators Signal Substantive Global Growth Acceleration

Key Quotes

"But instead of going back again to our forecasts for the year ahead, I want to focus instead on a wide variety of different assets that have long been viewed as leading indicators of the global cyclical environment. I think these are important, and what's notable is that they're all moving in the same direction, all indicating a stronger cyclical backdrop."

Andrew Sheets explains that he is shifting focus from direct forecasts to a collection of assets that historically signal economic conditions. Sheets highlights that the significance lies in these diverse indicators collectively pointing towards a strengthening global economy, suggesting a more substantial underlying trend.

"First, copper prices, which tend to be volatile but economically sensitive, have been rising sharply, up about 40% in the last year. A key index of non-traded industrial commodities, for everything from glass to tin, which is useful because it means it's less likely to be influenced by investor activity, well, it's been up 10% over the last year."

Andrew Sheets provides specific examples of these leading indicators, noting the significant rise in copper prices and industrial commodity indices. Sheets points out that non-traded commodities are particularly valuable as indicators because their price movements are less likely to be driven by speculative investment.

"Korean equities, which tend to be highly cyclical and thus have long been viewed by investors as a proxy for global economic optimism, well, they were the best performing major market last year, up 80%. Smaller cap stocks, which again, tend to be more economically sensitive, well, they've been outperforming larger ones."

Andrew Sheets continues to present evidence of a strengthening economic outlook by referencing the performance of Korean equities and smaller capitalization stocks. Sheets explains that these asset classes are considered sensitive to economic cycles, and their strong performance suggests broad investor optimism about global economic activity.

"And last but not least, financial stocks in the US and Europe. Again, a sector that tends to be quite economically sensitive, well, they've been outperforming the broader market and to a pretty significant degree. These are different assets in different regions that all appear to be saying the same thing: that the outlook for global cyclical activity has been getting better and has now actually been doing so for some time."

Andrew Sheets identifies financial stocks in the US and Europe as another key indicator of economic health, noting their significant outperformance. Sheets concludes that the convergence of these varied assets across different markets strongly suggests an improving and sustained global economic outlook.

"Now, any individual indicator can be wrong. But when multiple indicators all point in the same direction, that's pretty worthy of attention. And I think this ties in nicely with a key message from my colleague Mike Wilson from Monday's episode: that the positive case for US equities is very much linked to better fundamental activity, specifically our view that earnings growth may be stronger than appreciated."

Andrew Sheets emphasizes the importance of corroborating evidence from multiple sources, stating that a single indicator can be misleading. Sheets connects this observation to a broader theme from Morgan Stanley Research, suggesting that the positive outlook for equities is fundamentally tied to stronger-than-expected corporate earnings growth.