We update our barometer and tactical positioning for June.


Our forecast path for the WCA Fundamental Conditions Barometer declined in June (chart, below), and now sits just below 50. The decline in the index from above 70 at the start of the year suggests that risk appetite has waned somewhat. Accordingly, we trimmed back the equity exposure in the satellite portion of tactical portfolios to 45% from 55% last month.

Why is this happening?

A closer look at the data shows some evidence of softening in Europe, a build in domestic inventories, wider credit spreads, and some weakening of Asian financial conditions. None of these trends mark significant stress, but no longer do we see clear signs of improvement either. Instead, the evolving picture in 2017 is a more muddied one.

One possible culprit is the U.S. dollar. Since April, we have seen the dollar rise versus the Euro and on a trade-weighted basis. This is a marked shift from the general trend of 2016-2017 where the dollar’s value fell.

This change in direction is important because we saw improving fundamental conditions during the 2016-2017 period of dollar weakness. The “reflation” trade began in early 2016 and contributed to rising commodity prices, falling stress in emerging markets, and higher global growth. Because the “reflation” trade relies on a weak dollar, the shift to dollar strength hurts one of the pillars of the bull case for global growth. It also could cut short the commodity rally which boosted commodity based exporting emerging markets and sectors tied to rising commodity prices.

What Changed the Dollar’s Direction?

A shift in policies in the United States could lie at the heart of the change in dollar direction. Since April, we have seen monetary policy become less accommodative, and fiscal policy has become more expansionary. Under this scenario, we might expect to see a stronger dollar.

Just last week, we saw the Federal Reserve (Fed) raise rates in the United States. According to the Fed’s own projections, near-term economic growth is expected to be higher than long-run sustainable growth. Projections for 2018 growth were increased to 2.8% from 2.7%, which is higher than the committee’s 1.8% long-run growth rate. This supports a move toward tighter policy.

Back in April, we learned that the 2019 federal budget deficit is expected to be nearly $1 trillion, a 50% increase from 2016’s deficit. This increased deficit is seen as expansionary in the near-term as it involves both lower taxes and greater spending.


The tailwinds of reflation, low interest rates, and tax cuts fed a 40% rise in the U.S. stock market and lifted global growth the last two years. This good news has been recognized by financial markets and contributed to a surge in U.S. household wealth to over $100 trillion. At some point, we would expect to see some “settling down” which can be seen in the return of our WCA Fundamental Conditions Barometer to levels near 50.


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Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst

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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.

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