The improving growth theme gets tested again this week with data on factory orders and employment.


We are expecting to see a strong start to 2017, followed by a period of moderation through the year. We expect consumption to grow at a 5% annualized rate through the first quarter with investment growing at a 10% pace. If correct, the rolling four quarter average growth rate for the overall economy will be trending near 2.5% growth (chart below). This forecast incorporates our expectation for a March interest rate hike and recent readings from our WCA Fundamental Conditions Barometer.

The chart above traces the progression of the U.S. real growth rate measured as a rolling four quarter rate since 2009. Note the improvement in growth seen in mid-2016. As growth picked up, so too did the S&P earnings forecast. These improved expectations justify some, but not all, of the last year’s improvement in stock prices and correspond well to changes we’ve seen in our WCA Fundamental Conditions Barometer (below).

Importantly, improving growth is also evident in earnings expectations. According to FactSet Research, analysts now expect S&P 500 companies to generate $133.78 of aggregate operating earnings over the next 12 months. With the S&P 500 valued at 2,383, the forward earnings multiple is now 17.8 times forecast earnings. This is higher than the market’s 10-year average multiple of 14.4 times earnings, a 23% premium. We reduce our forecasted return to account for normalization of this premium over time.

With the growth and reflation story increasingly priced into markets the question is “what comes next?” In keeping with the usual dynamism of our market economy, the pace of improving growth and optimism is very likely to abate over time.



Date Report Period Survey Prior
Monday, Mar 6: Factory Orders Jan 0.9% 1.3%
Tuesday, Mar 7: International Trade Balance Jan -$47 B -$44.3 B
Wednesday, Mar 8: ADP Employment Report Feb 180 K 246 K
Nonfarm Productivity 4Q2016 1.5% 1.3%
Unit Labor Costs 4Q2016 1.5% 1.7%
Thursday, Mar 9: Weekly Jobless Claims Mar 4 223 K
Import Price Index M/M Feb 0.1% 0.4%
Import Price Index Y/Y Feb 3.7%
Friday, Mar 10: Change in Nonfarm Payrolls Feb 175 K 227 K
Unemployment Rate Feb 4.7% 4.8%
Average Hourly Earnings M/M Feb 0.2% 0.1%
Average Hourly Earnings Y/Y Feb 2.5%
Average Weekly Hours Feb 34.4 34.4
Labor Force Participation Rate Feb 62.9%
Underemployment Rate Feb 9.4%
Monthly Treasury Budget Feb $51.3 B
Source: Bloomberg



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



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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