Stocks (S&P 500) returned 6.3% in the first quarter and long-term U.S. Treasuries (+20 years) returned 1.25%. Cash generated a 0.22% return (T-Bills). Investor sentiment was strong during the quarter and market volatility was below normal.

Our second quarter outlook discusses our take on the economy and markets at this point. We continue to see the economy on a growth path, but fundamental conditions are expected to ease in the months ahead. It is important to recognize that much of the “reflation trade” that began last year is now largely reflected in market prices.

Consider the table below. We see that corporate spreads are already tight, inflation expectations are back above 2%, and commodity prices have rebounded. These factors are helping to support near-term economic growth and fostering higher earnings expectations. S&P 500 earnings for the first quarter and full year are forecast to grow 9%, for example.

The "Reflation Trade" since June 2016 
Source: Bloomberg
June 2016March 2017Comment
S&P 500 Earnings ForecastMeasure of anticipated corporate profits$123$1338% increase
Term SpreadMeasure of compensation for risk of holding longer term bonds108.5 basis points161.5 basis points 53 basis point increase
10 yr.TIPS BreakevenMarket implied long run inflation expectation1.6%2.1%(1.5-2.5% "normal" range)
Baa Corporate Bond Spread Measure of compensation to investors for assuming default risk220 basis points170 basis points(150-250 basis point "normal" range)
Commodity Price IndexPrice change on basket of commodities (CRB Index)26433025% Increase
Global stocks outperformed global bonds since the "reflation trade" began last June. The above data shows how financial markets responded to anticipated "reflation."

However, there is less consensus among economists over near-term growth. The Atlanta Fed’s “GDP Now” forecast and Macroeconomic Advisors’ forecast for first quarter GDP are both just below 1%. On the other hand, the Federal Reserve Bank of New York’s GDP “Nowcasting” service pegs growth near 2.6% for the first quarter and 2.9% for the full year. Last week’s second monthly decline in personal consumption expenditures was also a break from the otherwise positive stream of data we’ve enjoyed lately.

With the initial move from the “reflation trade” now in the rear view mirror, and with questions over the pace of growth, we are paying close attention to what comes next.


Date Report Period Survey Prior
Monday, Apr 3: ISM Manufacturing Index Mar 57.0 57.7
PMI Manufacturing Index Mar 53.4
Construction Spending M/M Feb 1.0% -1.0%
Tuesday, Apr 4: International Trade Balance Feb -$46.4B -$48.5B
Domestic Vehicle Sales Mar 13.65M
Total Vehicle Sales Mar 17.43M 17.47M
Factory Orders Feb 0.9% 1.2%
Factory Orders Ex Trans Feb 0.3%
Wednesday, Apr 5: FOMC Meeting Minutes Mar
ADP Employment Report Mar 180K 298K
ISM Non-Mfg Index Mar 56.5 57.6
Thursday, Apr 6: Weekly Jobless Claims Apr 1 258K
Friday, Apr 7: Change in Nonfarm Payrolls Mar 172K 235K
Unemployment Rate Mar 4.7% 4.7%
Average Hourly Earnings M/M Mar 0.3% 0.2%
Average Hourly Earnings Y/Y Mar 2.6% 2.8%
Average Weekly Hours Mar 34.3 34.4
Labor Force Participation Rate Mar 63.0%
Underemployment Rate Mar 9.2%
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

(973) 549-4052



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.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

This commentary often expresses opinions about the direction of market, investment sector and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

Washington Crossing Advisors LLC is a wholly owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF).