Insight & Commentaries

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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Next Up: The Fed

The world economy continues to grow at half-speed as emerging economies downshift from a period of rapid and credit-fueled growth. At the same time, developed economies like the United States appear to be growing at a slow-but-steady pace. Before the last recession, emerging economies grew near 9% and developed economies grew near 3%. Today, those growth rates stand nearer to 4% and 1.8%, respectively. The world’s economies are collectively growing at a little more than half as fast as they were just a few years ago. Financial market conditions are tightening, however, and this introduces some downside risk. Financial market…

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Sticking With U.S. Focus

The United States continues to make progress.  Yes, manufacturing slowed during the summer, but the rest of the economy is doing well.  Demand for goods and services is holding up.  More Americans are becoming employed and very few are filing for unemployment insurance.  For the first time in years, the percentage of the population with jobs is rising.  Income and spending are rising, too. With the unemployment rate at 5.1%, the Fed is nearing its first rate increase in a decade.  The Fed believes that the best way to forecast inflation is by looking at labor market slack.  To measure…

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To Raise or Not to Raise

This week brings more information on the economy’s performance including Friday’s August employment report.  The rise in volatility comes just weeks before the Federal Reserve (Fed) is expected to decide on the timing of the first rate increase in a decade.  Consequently, the focus will be on how the recent spike in market volatility is sustained and to what extent it feeds back into the real economy.  While last week’s tumult is probably too recent to register much of an impact on the employment report, each new piece of information from here will be evaluated from the perspective of how…

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Reality, Risk and Return

THE WEEK AHEAD Markets suffered losses last week as investors weighed a variety of threats to global growth, notably China.  Commodities remain under pressure and emerging markets continue to feel the pinch from global slowing.  As the dust settles, we believe the United States will remain an attractive destination for global capital.  We continue to focus strongly on quality and consistency in equity selection while tactical allocations have been moved closer to policy portfolio allocations.  Volatility is likely to remain elevated. Update on Our Outlook The past week again reminded investors that volatility is still with us.  Since 2012, stock markets…

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Countdown to Liftoff

With 38 days to go before the Fed’s September rate decision, we see some signs of risk aversion in markets and continued signs of weak growth outside our borders.  Here are just a few examples.  Credit spreads spiked last week, as the difference between the Moody’s Baa Corporate Bond Yield®, which acts as a credit index, and the long-term U.S. Treasury bond spiked above 230 basis points (it was 180 basis points back in April).  There is a growing number of declining equity issues across the various U.S. exchanges relative to advancing issues. A good portion of this turbulence can…

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Emerging Markets Tactical View

We see higher long-run returns from emerging markets after a five year period of sideways performance and as returns in recent years push the Morgan Stanley Capital International (MSCI) EM Index well below the long-run trend (chart below).  We are currently expecting long-run EM equity returns to be about 1% higher than our current long-run domestic equity return, now that the emerging markets have suffered through five years of sideways market action and underperformance versus developed equity markets.  The multi-year slog for emerging market investors means that major EM indices remain near the levels seen during the 2008-2009 recession, despite…

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Third Quarter Asset Allocation Report

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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Focus on Quality and Diversification

The market will digest the latest twist in the ongoing Greek bailout saga this week, Janet Yellen’s semiannual testimony before Congress on the economy and monetary policy, and a series of earnings reports including several of the major banks.  Our comments this week focus on how higher volatility shares reflect changed investor attitudes regarding risk in recent years. Macro View While the return of a risk-taking attitude is helpful for the economy to grow, we are mindful that there is an eventual limit to the amount of risk that markets will ultimately be willing to assume.  Increasing risk tolerance can…

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Greece’s Troubles

Greece’s troubles enter a new and uncharted phase this morning, as Greek negotiators abandoned talks this weekend with creditors and, instead, called for a July 5 referendum where the Greek people will vote on whether they agree with the latest proposal by creditors (which actually no longer exists).  Greece’s creditors rejected Greece’s request for an extension of the current loan program, which means that the Greek government will not have access to a remaining 16 billion Euros of additional funding.  Consequently, the Greek government will most likely miss a €1.5 billion Euro payment due to the International Monetary Fund (IMF)…

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