Quarterly Outlook

Viewpoint 2024

Over the past year, the economy and financial markets have surpassed most forecasters’ expectations. The U.S. economy grew at an annualized rate of 5% in the third quarter of 2023, with falling inflation, stable employment, and a rise in the S&P 500 stock index.

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Although the economy is faring better than expected this year, we see a mixed bag of signals. Forexample, while popular market-capitalization weighted stock indices are up for the year, the average stock is essentially flat. Moreover, the outlook for corporate profits and capital spending are flattening out, suggesting muted growth in the private sector ahead. Similarly, monetary and fiscal policies have diverged. Monetary policy is restrictive (higher interest rates), while fiscal policy is expansive (rising deficits). Cross currents such as these lead to a neutral read of incoming data, suggesting we keep portfolio risk exposure very close to benchmarks.

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As we pointed out in our Viewpoint 2023, the air of gloom that hung over markets at the start of the year was extreme. Instead, we saw improving fundamentals and opportunity for the situation to play out better than expected. So far, the economy and markets have proven resilient in 2023 with equity markets and the economy turning in better-than-expected performance. While the economy rolls along, however, there are some crosscurrents in the data leading us to avoid large tactical bets at the moment. Conquest Portfolios

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Surging inflation and interest rate expectations undermined stock and bond markets last year. There are nascent signs these trends may be reversing. Accordingly, stocks and bonds have rallied so far in 2023, despite the emergence of concerns in the banking sector. After a period of being slightly underweight equities, we have aligned tactical portfolio risk exposure close to benchmarks to reflect improvement in our WCA Barometer, coupled with a wide band of uncertainty around the forecast. Conquest portfolios

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Viewpoint 2023

We start 2023 coming off a tough 2022 for both stock and bond investors, where both assets suffered significant declines. However, inflation issues and higher interest rates, which dominated market focus last year, will likely fade in intensity in 2023.

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Central Bank all in to fight inflation Markets signal inflation to fade Rates to push higher still Policymaker credibility key to fight Valuations more attractive. We remain cautious based on incoming data and enter the final quarter underweight risk assets.However, policy priorities seem to be having some positive effect on expected inflation, despiteupsetting financial markets. This is a difficult and complex environment, and we continue to followour tactical discipline in navigating a very unusual year. While we are not out of the woods yet,valuations are becoming better as are longer-run expectations for returns.

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Set against a backdrop of rising inflation and interest rates, calls for a “technical recession” are growing. Our check of the data leads us to maintain our near-term, tactical “underweight” to stocks. However, the correction in stock prices contains a silver lining as valuations have become better, boosting long-run return expectations.

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The first quarter brought a surge in inflation and war in Eastern Europe. This environment imposes a new reality on investors and policymakers. In this report, we discuss what is happening and how our top-down portfolios are positioned now.

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Viewpoint 2022

We publish this year’s Viewpoint 2022 amid ongoing recovery from an unprecedented pandemic. Signs of continued growth are apparent despite new COVID-19 variants and anticipated policy shifts. Long-run return expectations fall this year in as valuations and profit margins are elevated for stocks. For fixed income investors, surging inflation and expectations for rising rates are of primary focus.

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Amid an otherwise positive backdrop, supply shortages, uncertainty over economic policy, and high valuations for financial assets are apparent. We remain tactically overweight stocks, but reduce exposure, shifting somewhat toward bonds. This report addresses how WCA tactical portfolios are positioned now to address short and longer-term factors.

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As the economy reopens, we believe growth is set to surge. The United States is well along the path on vaccination, which is unleashing months of pent-up demand. Meanwhile, other parts of the world are lagging in vaccinations and confronted with potential challenges, including a stronger dollar. Given continued signs of progress and growth in the United States, we refocus tactically around domestic and high-quality assets. We also maintain a tactical overweight to equity over bonds, given incoming data as we enter the third quarter.

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Key Points: Vaccines Spur Growth Rebound U.S. Profits Recover to Pre-Pandemic Levels High U.S. Savings to Fuel Growth Stronger Dollar Favors Domestic Tilt Valuations, Rates, and Taxes are Risks Much has changed in the past quarter. A new administration and new congressional leadership has emerged in Washington. Meanwhile, a COVID-19 vaccination rollout is accelerating throughout the United States and some other parts of the world. Speculative fervor has rippled through some parts of equity markets while bond investors fret about rising interest rates. This quarter we address how these changes are shaping the environment, creating challenges and opportunities for tactical…

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Viewpoint 2021

Many are expecting vaccinations to lead to a robust recovery this year. Return to normal and restart of the in-person economy should encourage growth and be celebrated. At the same time, the return to growth could also weaken the case for continued fiscal and monetary ease. And once restarted, the globe faces challenges. The tensions and ailments that existed before the pandemic are still with us. The path appears to be forward but it will not likely be a straight line. Last year’s pandemic-induced downturn was out-and-out different from recessions past. For this reason, we should see recovery as a…

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As we start the fourth quarter, the major U.S. stock market averages hover around a 0% return for the year. That unexciting performance masks extraordinary volatility — a 35% February-March decline and a 50% March-August bounce back. Other assets demonstrated similar volatility (graph, next page). Through September 30, Long-term U.S. Treasury bonds returned over 20%, and Bloomberg Barclays Aggregate U.S. Bond Index returned 6.5%. Short-term T-Bills returned about 0.7%, and gold is up 24%. Volatility again ruled the roost in 2020, and diversified portfolios generally did better than all stock portfolios. As we head into the final quarter of 2020,…

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Executive Summary: The second quarter brought a surge in stock values predicated on three critical assumptions. First, fiscal and monetary measures would be sufficient to support an economy suffering a tremendous hit. Next, the economy could begin a process of “reopening” and avoid a second wave pandemic shutdown. Finally, progress will be forthcoming toward a treatment or vaccine for COVID-19. While the future could always play out differently than expectations, equity markets seemed willing to focus on positives, rather than lingering unknowns, throughout most of the second quarter.

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Tactical asset allocation in CONQUEST portfolios is discussed in this quarterly series. In this quarterly installment, we discuss how CONQUEST is adapting to rapid changes brought about by the outbreak of Covid-19. An encouraging start to the year gave way to the unsettling reality of a global pandemic last month. In very short order, financial markets responded to extraordinary societal changes. Since February 19, global stock markets shed a record $25 trillion (30%) in a matter of days after Covid-19 became a pandemic. Bond markets and commodities also exhibited volatility and complicated movements. Not since 1987 have markets adjusted with…

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Viewpoint 2020

Worries over rising rates and trade faded in 2019, prompting sizable gains in both bonds and stocks. Global growth seems to be firming and the United States is exhibiting stronger growth than most other developed nations as we start 2020. Low interest rates, rising wages, and record wealth is driving growth, but above average valuations reduce return expectations. This report covers Washington Crossing Advisors’ long-run views as we head into 2020. These top-down views are central to our tactical asset allocation decisions and recommendations.

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Trade and Brexit worries are cutting into the outlook for global growth. Most forecasts now call for slower growth next year, below our 3.5% base case expectation. While growth estimates are holding up reasonably well in the United States, global central banks are easing. The Federal Reserve is also easing monetary policy, which is helping to support financial conditions. A plunge in global interest rates is raising recessionary red flags and forward looking cash and bond returns are declining as investors chase yield. Equity allocations are trimmed to neutral given signs of cooling in the data. Tactical tilts favor value…

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The past few months have seen a marked decline in market volatility. Corporate earnings are holding steady and bond yields have declined, allowing stock values to recover from last fall’s rout. However, concerns about trade, capital investment, and global growth remain and are opening the door for central banks to ease. Our read of a broad range of data is better than six months ago, with domestic conditions winning out over foreign. Therefore, we maintain tactical tilts toward domestic over foreign, value over growth, and developed over emerging. Near-term trends in our WCA Fundamental Conditions Barometer lead us to maintain…

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The S&P 500 returned 13.7% in the first quarter, the best quarterly performance since 2009. This follows almost a 20% drop in the S&P 500 during the fourth quarter. The concerns about global growth and rising interest rates, which contributed to last fall’s market selloff, appear to be easing. The WCA Fundamental Conditions “Barometer” advanced sharply in the past few weeks as signs emerged that growth may be picking up in the United States. Accordingly, equity exposure was increased and bond portfolio duration reduced across tactical asset allocation models. Full Report Click Here

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Viewpoint 2019

Against a backdrop of worry over trade and rising interest rates, the United States economy continues to perform well. While equity markets generally declined in 2018, investors in the United States generally fared better than overseas. Moreover, most companies saw revenue, profits, and dividends grow in 2018, and we expect more to come in 2019. This annual Viewpoint, along with quarterly updates, provides an organized way of looking at the economy, financial markets, and your portfolio. The full report is available by clicking the link below.

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Ten years after the financial crisis, the United States equity, real estate, and job markets are back to records. Household wealth has, therefore, surged to a record $106 trillion. Most of the trends we see in the domestic data flow remain strong, although conditions overseas paint a less compelling picture. With much of the slack in the domestic economy gone, and inflation near target, we expect the Federal Reserve to continue normalizing interest rates. Portfolios are tactically overweight value stocks, domestic and developed equities, short duration Treasuries, and real estate. Tactical underweights include growth, foreign and emerging markets, long-duration Treasuries,…

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The U.S. economy is accelerating into the second half of the year with growth tracking toward 4% in the second quarter. However, the yield curve has flattened significantly as the Fed presses forward with rate increases, and trade concerns create some unease. Consequently, our own read of the data has become more mixed and we have tactically reduced exposure to stocks during the first half. Portfolios are overweight value versus growth, and foreign developed versus emerging. The fixed income posture is tilted toward high quality and shorter duration credit versus long-duration Treasuries. We also have a tactical tilt toward REITs…

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2018 Viewpoint

Our 2018 Viewpoint begins on an optimistic note. Growth continues to pick up by most accounts, businesses are again investing, and asset values are near records. Confidence necessary for risk taking is apparent, and inflation remains at bay. On the other hand, we are now confronted with higher valuations in many asset classes, which we feel should eventually weigh on long-run returns. This annual Viewpoint, along with quarterly updates, provides an organized way of looking at the economy, financial markets, and your portfolio. Full Report Click Here

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We see the economy on a growth track, but after a year of strong returns and historically low volatility, some moderation to growth and risk appetite seems reasonable. Continued economic growth, without a notable pickup in inflation, remains our dominant view. Last year’s tax changes, and new federal spending initiatives, have the potential to lift investment and speed up growth. Risks to our outlook include rising trade and geopolitical tension, elevated asset prices in some areas, and rising interest rates. During the quarter, we made a few tactical adjustments to portfolios. We tilted portfolios toward large cap domestic value, and…

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We enter the second half of 2017 with data coming in well, asset prices near records, and market sentiment good. Our analysis of current fundamental conditions points to continued growth, but the “reflation” and “Trump” trades may be losing some momentum. Portfolios are tactically tilted toward U.S. equities, with an emphasis on growth. Fixed income continues to focus on corporate bonds over Treasuries given our outlook. Full Text Here

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The “reflation trade” that drove financial market behavior since the middle of last year lifted stocks and weighed on bond prices. This leaves us with an economy performing better and stock indices near records. Lower bond yields and higher equity valuations help lift short-term growth but also dampen our long-run return forecasts. In the months ahead, we expect to see the pace of improvement moderate compared to what we experienced over the past nine months. Equity allocations in portfolios were increased last summer, and we continue to maintain a modest tactical tilt toward large capitalization domestic stocks over bonds and…

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The economy continues to gradually improve from a near stall earlier in the year.  Earnings forecasts are increasing, and cash returns to equity investors look appealing compared to record low Treasury yields.  With signs of economic slack abating, the Fed now seems to be on track for a December rate hike. Equity allocations in portfolios were increased to overweight during the summer, and we continue to maintain a tilt toward large capitalization domestic growth stocks versus foreign.  Bond allocations are tilted away from low-yielding, long-term Treasuries, favoring shorter-duration and higher-yielding corporate debt. Full Report Click Here

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The first half of the year saw a turnaround in several indicators we watch. While bonds managed to outperform stocks in the first half, signs of improvement in the domestic economy are emerging. Our read of recent trends in the data gives us a basis for optimism on near-term growth. Overseas prospects are still fading, and growth rates are still coming down. Britain’s “exit” referendum poses challenges to Europe at a time when growth is already weak, for example. Our WCA Fundamental Conditions Barometer remains below 50, but is showing signs of improvement. The “core” of portfolios were recently rebalanced…

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Asset Allocation Update Second Quarter, 2016 The economy is slowing. After growing 1.4% in the fourth quarter, estimates are below 1% for first quarter. The global econ­omy is faring little better. The International Monetary Fund cut its 2016 global growth forecast to 3.2%. In January, this estimate stood at 3.4%. Why so slow? A steady erosion in productivity, anemic labor growth, and deleveraging all play a role. These facts, especially productivity and labor, are harder to influence through policy. Fiscal and monetary policy are simply incapable of addressing these remaining challenges head-on. The trinity of productivity, labor, and investment determine growth…

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2016 Viewpoint

Our macro outlook is for slow growth and stubbornly low inflation. The start of policy normalization following years of zero interest rate policy in the United States comes at a time of weakening global growth and mixed signals from the domestic economy. We continue to view the United States economy as best positioned to weather the overall weak global environment that resurfaced in 2015. In this report, we take a long-term view and address expectations for markets over the long run. Full Report Click Here  

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Full Report 2015 is off to a slow start for investors, as stocks closed the second quarter essentially flat year-to-date and bond returns were generally negative. There are some positive takeaways from the second quarter that should not be overlooked, however. Key Points: The economy is again growing slowly (likely near 2% in the second quarter) after grinding to a halt in the first quarter. The thought of the first quarter stall leading to a recession is fading, and while our WCA Fundamental Conditions Barometer is far from strong, it has stopped slipping and has even seen a small bounce…

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Six years beyond the recession, we thought it would be helpful to pause and take stock of how far we have come.  Gross domestic product is about two trillion greater than where it stood during the recession.  Corporate earnings and dividends have ballooned.  Employment rolls are filling, and the unemployment rate is down considerably.  Lower fuel costs and accelerating personal income trends are helping to drive domestic sales increases.  This is a very good outcome compared with where we were just a few short years ago… For the complete report, please click here.

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First Quarter Asset Allocation Review As we head into the new year, we see the United States economy emerging as a bright spot on the global stage. For 2015, we expect to see above-trend growth, further improvement in private sector balance sheets, and generally improved confidence. The domestic economy should perform better than Europe, where structural reform is still needed, and better than many of the emerging markets, which continue to struggle. Chinese growth should continue to moderate, while Russia and other large net energy exporters will struggle given today’s lower oil price. View Full Report (Adobe PDF)

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