Monday Morning Minute 020617
THE WEEK AHEAD
Data continues to come in relatively strong with last week’s employment report offering mostly good news.
MACRO VIEW
The January data continued to post positive momentum, supporting the bullish case for stocks. Friday’s January employment report was not an exception.
Nonfarm payrolls rose 227,000 and beat most economist’s expectations. This is higher than the 180,000-200,000 range we’ve become accustomed to see over the past several quarters. The unemployment rate ticked up to 4.8%, but remains near what many consider “full employment.”
A closer look at private jobs reveals still healthy year-over-year growth. This measure, which ignores government jobs, shows a 1.8% increase year-over-year. We tend to look at 1% as our “stall speed” given the tendency of the economy to perform poorly once growth dips below that level. While the growth rate is down from 2.4% a year ago, today’s 1.8% rate is still comfortably above this “stall speed.”
One last area to consider is wages. Consumer demand continues to be relatively steady, but is dependent upon wages. Personal consumption is accelerating toward a 4.5-5% range, while implied income growth from the employment report suggests moderation. Typically, the implied growth from the employment report leads the actual personal consumption data by a few months. This is worth watching as the year progresses as it implies slower growth ahead.
Overall, the employment report was a solid one. It reinforces the slow-and-steady growth dynamic we are seeing across a broader set of indicators. It also contributes to a body of evidence that is mostly equity market friendly.
EARNINGS SEASON UPDATE
FactSet estimates S&P 500 earnings for the fourth quarter is tracking toward 4.6% growth. Expected S&P 500 operating earnings now stands near $133.54 over the next 12-months, according to FactSet’s analyst survey. At this Level, the S&P 500 trades at 17.1x earnings or 19% above the 10-year average multiple.
ECONOMIC RELEASES THIS WEEK
| Date | Report | Period | Survey | Prior |
| Monday, Feb 6: | Labor Market Conditions Index | Jan | — | -0.3 |
| Tuesday, Feb 7: | International Trade Balance | Dec | — | -$45.2 B |
| JOLTS | Dec | — | 5.522 M | |
| Wednesday, Feb 8: | Crude Oil Inventories (barrels) | Feb 3 | — | 6.5 M |
| Gasoline (barrels) | Feb 3 | — | 3.9 M | |
| Distillates (barrels) | Feb 3 | — | 1.6 M | |
| Thursday, Feb 9: | Weekly Jobless Claims | Feb 4 | — | 246 K |
| Friday, Feb 10: | Import Prices M/M | Jan | — | 0.4% |
| Export Prices M/M | Jan | — | 0.3% | |
| Import Prices Y/Y | Jan | — | 1.8% | |
| Export Prices Y/Y | Jan | — | 1.1% | |
| Consumer Sentiment (Preliminary) | Feb | — | 98.5 | |
| Treasury Budget | Jan | — | -$27.5 B | |
| Source: Bloomberg |
ASSET ALLOCATION PORTFOLIO POSTURE
Based on shorter-term expectations, the “tactical” allocation within portfolios is underweight bonds / overweight stocks.
Kevin Caron, CFA, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst
(973) 549-4052
Disclosures
WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.
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