Insight & Commentaries

Markets Digest Brexit

Britain’s decision to leave the European Union (EU) reflects widespread dissatisfaction with EU governance.  The rejection of EU governance highlights the inherently unstable nature of the organization.  If individual members experienced long-run benefits, defections would not occur.  Instead, the people of Europe would press for a formal merger.  If individual members become dissatisfied, these countries are likely to break away.  Why would a dissatisfied and democratic country like the United Kingdom look to remain?  Most, including us, believed the vote would lean toward maintaining the status-quo.  This exit vote marks the first tangible step backward from the decades old vision…

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The Week Ahead: May 16, 2016

This week’s data includes a look at consumer prices and industrial production on Tuesday.  Each is relevant given recent below trend growth in fundamental data. MACRO VIEW Headline consumer prices (CPI) in the last year were pressured by a sharp decline in the energy component of the index.  Stripping out energy (and food), core underlying inflation trends appears stronger (second chart, below).  The core inflation numbers tend to be the ones emphasized most by policy makers, however.  The rise in current core inflation trends stand at odds with overall inflation and future expectations for falling headline inflation (bottom chart, below)….

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Second Quarter Asset Allocation Report

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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Weekly Comment

Productivity growth averaged 3% through the 1950s and 1960s, declined to 2% from the mid-1970s through 2007, slid to just over 1% since the 2008-2009 recession, and fell to under 0.5% last year.  We are at serious risk of stagnating growth, should this trend continue.  In such an environment, tactical approaches will be required as long-run returns would tend to diminish with real growth rates.  Currently, we see recession risk above historic averages, given generally weakening global data.  This slippage in fundamentals that became more evident in late 2015 contributed to our elevated focus on quality in equity portfolios and…

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Weekly Comment

The Doha oil talks concluded with a resounding thud over the weekend, as media sources reported an abrupt end to talks aimed at curtailing oil supply.  Iran’s absence at the meeting was cited as a primary catalyst for the end of talks.  We expect oil to trade lower, as markets unwind some of oil’s recent run-up that occurred in anticipation of more positive news.  Brent crude closed Friday 14% above its 100-day moving average and more than 50% above the January lows near $26.  Given the elevated correlation between credit spreads and oil prices, we would not be surprised to…

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The Real Reason Growth is So Slow

THE WEEK AHEAD The Federal Open Market Committee (FOMC) conducts their March meeting on Tuesday and Wednesday. Growth overseas remains sub-par, but U.S. consumer spending is stronger and monthly job gains are up 235,000 over the last six months. Signs of moderate inflation can are evident in the personal consumption expenditures price index.  This index rose 1.3% year-over-year in January. MACRO VIEW All the churn in markets during the first quarter had little impact on our assessment of fundamentals.  Our WCA Fundamental Conditions Barometer remains below 50 and portfolios are defensively allocated.  The latest actions by the European Central Bank…

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WCA Weekly Update

Light economic data from the United States expected this week, and the European Central Bank (ECB) is expected to deliver additional monetary stimulus.  China releases February’s Merchandise Trade Balance, Consumer Price Index, and Producer Price Index while Japan and the EU both release their latest GDP prints. MACRO VIEW We are looking for signs of an upturn in the data when we update our WCA Fundamental Conditions barometer and forecasts next week.  For now, we view the recent stabilization in commodities and better tone in the stock market as providing some reason for optimism, but we need further evidence that…

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Emerging Markets Update

It is not very often that emerging market equities trade with valuations this low compared to the S&P 500.  Typically, emerging markets trade with a lower multiple than developed given greater risks.  Yet, there have been few times over the last twelve years when emerging markets were valued this low on a price-to-earnings ratio basis compared with the United States.  Lower relative valuations reflect a variety of concerns including commodity prices, credit quality, currency, and growth.  All of these are valid things to be concerned about and we’ve written about them before.  Still, we have seen emerging markets underperform their developed market counterparts for…

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Employment — Not the Root Cause of Inflation

MACRO VIEW We are not in a recession, but we are seeing data that is uncharacteristically weak for an expansion. The last quarterly GDP report showed 0.7% annualized growth for the latest quarter with real GDP up just 1.8% over the year prior (below). This growth is too weak for comfort as it leaves the economy more exposed to a potential recession in the event of a unforeseen shock. Headline inflation of 0.4% is still well below the Federal Reserve’s (Fed’s) target and core personal consumption expenditure prices are up just 1.2% through December compared to a year earlier. January’s…

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Earnings Season is Underway

The Federal Open Market Committee (FOMC) convenes for the first time in 2016 on Tuesday and Wednesday amid the worst start to the year ever for the equity markets. Market uncertainty and low oil prices have tempered expectations for how quickly the Federal Reserve (Fed) will raise interest rates this year. Unlike the previous FOMC meeting in December 2015, Janet Yellen will not hold a press conference at the conclusion of this meeting.  The earnings season is underway and expectations are for a 6% decline in earnings, which would mark the third consecutive quarter of earnings declines.  The S&P 500…

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FRB Atlanta Sees Q4 Growth of 0.6%

A short trading week sees December 2015 Consumer Price Index released on Wednesday, January’s Philadelphia Federal Reserve (Fed) Business Outlook Survey on Thursday, and December 2015 Existing Home Sales on Friday. Consumer prices have been showing more life than other inflation readings. According to Econoday, the consensus for December is for a fourth straight 0.2% gain for the core (ex-food and ex-energy) reading. Total prices are expected to come in unchanged reflecting another expected decline for energy. The Federal Reserve Bank of Atlanta recently lowered its Fourth Quarter of 2015 growth forecast from 0.8% to 0.6% (see below). This would…

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China

China dominates the discussion as we begin a new year.  Sharp drops in Chinese stock markets forced closure of mainland exchanges last week.  Indications are increasing that China is seeking to further devalue its currency in the face of weak export demand and declines in manufacturing.  We think such a move represents a step backward on the path toward rebalancing and internationalization, which ultimately leads to a healthier outcome for China and the world. Devaluation perpetuates dependency on a broken model of export-driven growth and delays a necessary shift toward a greater role of the private sector and domestic consumer…

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