Insight & Commentaries

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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International Concerns Out of the Gate

This morning’s equity market sell-off follows a 7% decline in China’s Shanghai Stock Exchange Composite Index.  The decline tripped circuit breakers and led to a closure of China’s exchanges.  A weak read on China’s official Purchasing Manager’s Index (PMI)  and increased tension between Saudi Arabia and Iran are contributing to the negative tone.  China’s PMI remained below 50 for a fifth month and points to continued weakness in China’s manufacturing sector.  Protests and an attack on Saudi Arabia’s embassy in Tehran, precipitated by Saturday’s announcement of Saudi Arabia’s execution of 47 prisoners, including a well-known Shiite cleric, adds to investor…

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Viewpoint 2016 — Long Run Assumptions

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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Closing Out 2015

Markets will digest data from the real estate market, as Tuesday sees the release of the S&P Case-Shiller Report from October and Pending Home Sales from November is released on Wednesday. Markets are closed on Friday for New Year’s Day. The economy is closing 2015 with a whimper.  This week we will get the Chicago Purchasing Managers index for December.  Lately, this Index has been weak, reflecting a build of inventories and weak export markets.  Chicago is just a regional survey but does a reasonably good job in predicting movements in the national survey which, in turn, is a reasonably…

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Shortened Week Ahead

A Christmas-shortened week sees the final release of third quarter Gross Domestic Product (GDP) on Tuesday and Core Capital Goods Orders on Wednesday. Markets close early on Thursday for Christmas Eve and are closed on Friday for Christmas Day. Core Capital Goods Orders could be the best leading indicator of all on business investment spending. Orders tend to decline six to twelve months before an economic downturn and typically rebound anywhere from three to eighteen months after the bottom of the recession (See chart below).  The steady climb in capital goods orders that followed the last recession has slowed somewhat…

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Ingredients for Growth

The United States appears to be generating better growth these days when compared to estimates of its potential.  The graph below shows how the United States’ output has risen by more than the potential growth estimated by the Congressional Budget Office.  For seven quarters in a row, the economy has produced a higher growth rate than potential, which is absorbing excess capacity.  As this happened, the unemployment rate fell to near 5% from 10% back in 2009.  The total number of hours worked has expanded by 10% over that period as more jobs were added than lost.  Capital investment has…

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Growth Slows and Caution Increases in 2015

This week, data on industrial production, housing starts, and consumer prices are expected.  Industrial production has recently been weak, and consumer prices are advancing below the Federal Reserve’s (Fed) 2% target.      Macro View The WCA Fundamental Conditions Barometer indicates a softening of growth through the last three months.  Following August’s volatility spike, the forecasted path for our barometer was ratcheted down incrementally.  Currently, we see the barometer trending toward the 30-40 range in the months ahead (graph below).  Not surprisingly, equity markets and most economic forecasters are adjusting to a lower expected global growth rate.  The August and…

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Fourth Quarter Asset Allocation Report

Full Report WHAT ’S DRIVING GROWTH? Asset Allocation Update Fourth Quarter, 2015 From 1980 to 2007, the economy grew near a robust 3-3.5% trend growth rate throughout the 27-year period. The period began with the Dow at 840 and ended 2007 with the Dow over 13,000. Recessions were of the normal variety, with business slumps followed by robust recoveries and expansions. Technology, an expanding workforce, a pervasive spirit of entrepreneurial risk-taking, freer trade, lesser regulation, and reduced tax burdens all fostered growth. This 27-Year Period Saw: 1. GDP grow to $15 trillion from $6.5 trillion, 2. Household net worth grow to $67 trillion from $10…

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Fed Strikes More Hawkish Tone

This Friday’s employment report took on some additional importance last week as the Fed reminded markets that they remained focused on incoming data for guiding their decision regarding a rate hike in December.  Last week’s policy statement was interpreted as more hawkish, since it referred to monitoring data for determining a rate hike “at its next meeting.”  Some interpreted the mention of the specific calendar date as an indication of greater hawkishness, after several weeks of increasing speculation that a rate hike would be pushed further out into 2016.  The Fed’s posture seems to lean in the opposite direction of…

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Global Growth Disappoints

The Federal Reserve (Fed) meets on interest rates this week, and two indicators of October manufacturing activity are expected to indicate weakness through the month.  Expectations for an imminent rate hike have been moving further out as global growth disappoints.  The International Monetary Fund (IMF) recently cut their forecast for global growth to just 3.1% this year, compared to 3.4% growth last year.  The globe is struggling with an adjustment to a lower growth trajectory following a series of credit and investment booms.  The latest indications of declining growth came from the Mario Draghi and the People’s Bank of China…

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2015 Needs a Boost

The WCA Fundamental Conditions Barometer remains weak reflecting slower global growth.  Our updated forecast has the barometer tracking toward 43 for October and remaining in the 40-45 range for the fourth quarter of the year.  The bright spot remains domestic final demand which continues to plow forward on steady improvement in employment and wages.  The pickup we saw from the second quarter is not continuing into the third quarter and both the IMF and the Atlanta Fed’s GDP Now forecast are being trimmed.  The IMF again revised its global growth rate down to an estimated 3.1% for 2015 and the…

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Third Quarter Earnings Preview

Earnings Season Ahead The third quarter is over, and companies will begin reporting soon.  Expectations are for a 5% decline in earnings, according to a FactSet survey.   If so, the decline will be the second in a row and the first back-to-back decline since 2009.  Still, we see corporate balance sheets and cash generation at very robust levels, but the composition of sources and uses of cash are shifting (more on this below). The usual suspects will be identified as sources of weakness.  A strong dollar, weak commodity prices, and slower overseas growth will top the list of challenges. The…

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