Insight & Commentaries

Monday Morning Minute 120516

THE WEEK AHEAD We continue our focus on the potential impact of President-elect Trump’s policy proposals on the economy and our long-run capital market assumptions. MACRO VIEW The “Trump” rally signals an expected policy shift based on candidate Trump’s promised economic reforms.  His economic plan seeks to achieve faster growth through a combination of proposals designed to lower taxes and regulation.  Is this expectation reasonable? To begin with, the plan, as outlined during the campaign, is large.  If implemented as proposed, it would include the largest tax cut since the 1980s.  For individuals, the tax plan consolidates seven tax brackets…

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Monday Morning Minute 112816

THE WEEK AHEAD Purchasing managers’ surveys and the November employment situation reports are out this week.  We expect solid showing in both areas. MACRO VIEW Friday brings the final employment report before the Federal Reserve’s December meeting.  Given other recent reports, we expect a solid report with monthly payrolls up ~200,000.  This should provide further justification for what is now a widely expected December rate hike.  We are also watching for the wage component and expect another strong rise in wages and salaries.  A 4-5% increase in year-over-year incomes seems easily in the cards and should garner significant attention. The…

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Monday Morning Minute 112116

THE WEEK AHEAD A shortened week due to Thanksgiving.  Markets to focus on durable goods, Trump transition, and upcoming Italy vote. MACRO VIEW The market’s recent reaction to a Trump victory adds fuel to what was already an improving fundamental backdrop (graph, below). How are fundamentals improving?  For starters, the bottom-up S&P 500 12-month earnings forecast advanced from a monthly average of $123.52 in the first quarter to $129 currently.  Risk appetite improved and higher-risk stocks and bonds both outperformed their lower-risk counterparts.  Long-run inflation expectations firmed from 1.4% to 1.75%.  A pickup in China’s economy, firming commodity prices, the…

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Monday Morning Minute 111416

THE WEEK AHEAD How the Trump win changes markets, the economy, and CONQUEST and DYNAMIC STRATEGIES portfolios. MACRO VIEW While light on details, the Trump economic vision is capturing the market’s attention.  The sweep by Republicans came as a shock to markets, and President-elect Trump’s acceptance speech highlighted spending and tax cut initiatives that are welcomed as “pro-growth.”  There is much still that needs to be worked out, and the devil is always in the details. If campaign promises are enacted as stated, sweeping changes to trade, taxes, government spending, and regulation are all on the table.  Most proposals on…

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Monday Morning Minute 110716

THE WEEK AHEAD Voters head to the polls. MACRO VIEW Markets are pricing in greater political risk headed into this week’s election.  Looking beyond the market action, however, we see encouraging fundamental signs.  Employment gains, steady job growth, stable demand, and a return to earnings growth all speak to a better backdrop for stocks.  Domestic economic growth should be near our 2-3% range in the second half, marking a clear turnaround from the pattern of weakening growth through 2015 to the first half of 2016.  It is even likely that business investment is picking up, now that the ill effects…

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Monday Morning Minute 102416

THE WEEK AHEAD Active week for earnings as 178 of S&P 500 companies are scheduled to report. As per FactSet, Q3 2016 blended year-over-year earnings are expected to decline 0.3%. The blended sales growth rate for Q3 2016 is 2.6%. The forward P/E multiple is now 16.5x, which is above the 10-year average of 14.3x. Friday’s advance release of Q3 2016 GDP should attract attention in addition to the five members of the Federal Reserve scheduled to speak today and Tuesday. S&P ESTIMATES and VALUATION Equity investors should focus on earnings as the long-term driver for return. For calendar year 2016,…

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Monday Morning Minute 101716

THE WEEK AHEAD Corporate earnings are expected to contract moderately this quarter (-1.8%) for the sixth consecutive quarterly decline.  However, much of the data we follow improved through the summer, suggesting potential for upside surprises.  We update our forecast for the WCA Fundamental Conditions Barometer which stands near 70, reflecting improved near-term growth and lessened recession risk. MACRO VIEW The WCA Fundamental Conditions index showed steady improvement in recent months (Chart A), and our near-term forecast (Chart B) continues to track above 50.  Barometer readings above 50 imply a higher probability of continued growth, with lessened near-term recession risk.  The…

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Monday Morning Minute 101016

THE WEEK AHEAD The Federal Reserve releases minutes from their latest Federal Open Market Committee (FOMC) meeting Wednesday, and retail sales figures are due Friday. MACRO VIEW Friday’s employment report suggests that income and spending are still growing.  Six and one quarter years from the recession’s end, we see that the average wages and total numbers of hours worked are expanding.  We estimate that hours will be expanding at a 1.5% yearly rate and wages will be growing at 2.5%.  Combining these figures, total income should be expanding near 4%, and this pace is consistent with an expansion in consumer…

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2016 Fourth Quarter Asset Allocation Report

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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Monday Morning Minute 092616

THE WEEK AHEAD We look at credit, debt, and leverage given new data from the Federal Reserve (Fed). We conclude that private sector debt and leverage remain important contributors to both risk and growth. Elevated levels of private sector debt and leverage increase potential risks that should be addressed in portfolios as the cycle ages. MACRO VIEW Recent data from the Federal Reserve shows private sector debt remains elevated despite some household deleveraging. We continue to believe a relationship exists between private sector debt, the economic cycle, and equity market volatility, and that relationship is stronger today than years ago….

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Monday Morning Minute 091916

THE WEEK AHEAD Federal Open Market Committee (FOMC) rate decision, projections, and press conference Wednesday afternoon should garner significant attention and will Likely sets the stage for a December tightening. MACRO VIEW This week’s FOMC meeting should set the stage for a December hike.  There is little in recent statements that lead us to believe a September tightening is in the cards.  Data since July was generally positive, opening the door for a more balanced statement.  Brexit failed to produce a worse case dislocation, and leading indicators appear resilient.  The WCA Fundamental Conditions Index rose through the summer months, and…

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Monday Morning Minute 091216

This week’s Consumer Price Index data will shed more light on underlying inflation ahead of the Federal Reserve’s (Fed’s) September 21 meeting. MACRO VIEW In 1919, the Federal Reserve Bulletin stated that inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods.  We like this definition because it recognizes inflation as essentially a “monetary phenomenon,” to borrow Milton Friedman’s words.  It also clarifies the central bank’s role as chief steward of the money supply and inflation rate.  Inflation, or lack thereof, is the key feature in the debate over the…

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