Last updated: 21:01 / Monday, 28 March 2016
Says Franklin Templeton

Volatility Does Not Indicate a US Recession

Volatility Does Not Indicate a US Recession
  • Bowers believes the US economy is performing well
  • A strong dollar and low oil prices affected earnings
  • Technology and health care companies have positive long-term outlooks

Signs of a global economic slowdown have impacted the US equity market this year and led to discussions about a possible recession in both the US economy and US corporate profits. Grant Bowers, vice president, Franklin Equity Group, says current conditions and the outlook for a key economic indicator don’t warrant such strong language. In this Q&A, Bowers maintains that, with the help of stronger consumer spending, the backdrop for the US economy and US companies should remain generally positive for the remainder of 2016.

Concerns about growth in emerging markets and collapsing energy prices have led many to fear that despite generally positive economic data in the United States, we may not be able to avoid lapsing into a recession. This has driven market pessimism to extremely high levels in the first few weeks of 2016. Despite these fears, Bowers continues to believe the US economy is performing well, "and 2016 will likely surprise many with modest corporate earnings growth, strong consumer spending and gross domestic product (GDP) growth in the 2%–3% range. These types of broad-based selloffs typically create opportunities for long-term investors to buy high-quality companies at attractive prices, and we have been actively seeking bargains for our portfolios in recent weeks."

Despite a rough start to the year, he adds that they "don’t see a recession on the horizon, and believe the US economy is stronger than many believe. Every expansion since World War II has gone through periods of slow growth. I believe that when we look back in the rear-view mirror later this year, we will see this period as a growth pause in a longer expansionary cycle." Bowers cites the strength of the US consumer as one of the reasons they remain constructive on US equities.

According to him, two key themes that emerged from earnings season. "First, a stronger US dollar was a headwind for many multinational companies, and the currency impact combined with slower global growth resulted in companies with high international exposure experiencing slower growth relative to more domestic or US-focused companies; second, lower oil and gas prices had a negative impact, where year-over-year earnings were down more than 70% for the energy sector, dragging down the average growth rate." However he believes that "as consumers become more comfortable with lower energy prices, they will start increasing their spending on discretionary goods and increased consumption."

Him and his team have a positive long-term outlook for technology and health care companies "with a tremendous amount of change likely to take place in the next few years... Some of the areas of technology that we are focused on are cyber security, Software as a Service (SaaS), cloud computing, digital payments, mobility and smart devices. In the health care sector, we continue to like the long-term outlook, where an aging population globally will drive increased consumption of health care services and demand for improved treatments and cures. This demographic tailwind combined with innovation in drug development and medical technology is creating numerous investment opportunities as well."

Regarding the 2016 US presidential election, he believes the political uncertainty has contributed to some of the volatility we have seen year-to-date. And expects it to continue "until the presidential primaries are settled and we have a better understanding of who the major parties’ nominees are and what their policy proposals will be."