We forecast that the accelerating growth phase of the past year will flatten out in the months ahead. A ramp-up in growth and investor risk appetite over the past year, courtesy of the dual “reflation” and “Trump” trades, helped lift earnings and share prices to records and volatility fell sharply. Our most recent read of the data suggests the acceleration phase may be over, and the forecast path of our WCA Fundamental Conditions Barometer (below) is expected to return to 50. At 50, we expect near-term recession risk to be near historically average levels.

Where we go from here is unclear. While growth seems to be on a favorable tack, valuations seem to be discounting strong economic and earnings growth (analysts expect S&P 500 earnings to rise 10% this year and 12% next, according to FactSet, for example). Pushing against this rosy backdrop is some recent slippage in inflation and sluggish investment. If these trends continue, overly bullish expectations could be easily called into question. Today’s lofty expectations, evident in elevated market multiples and low volatility, make the risk-reward tradeoff less appealing from our vantage point.

In keeping with our tactical discipline, we cut exposure to equities in the satellite portion of asset allocation portfolios from overweight to neutral last week. This move is supported by a downward revision to our near-term forecast path for the WCA Fundamental Conditions Barometer. This change marks the first “downshift” in equity allocation since late 2014.




Date Report Period Survey Prior
Monday, July 24: Existing Home Sales M/M June -1.4% 1.1%
PMI Composite Flash July 53
PMI Manufacturing Flash July 52
PMI Services Flash July 54.2
Tuesday, July 25: FOMC Meeting Begins
Consumer Confidence July 116 118.9
S&P Corelogic CS HPI 20 City M/M SA May 0.3%
S&P Corelogic CS HPI 20 City Y/Y NSA May 5.7%
S&P Corelogic CS HPI US Y/Y NSA May 5.5%
Wednesday, July 26: FOMC Meeting Announcement
New Home Sales M/M June 0.9% 2.9%
Thursday, July 27: Weekly Jobless Claims July 22 233K
Durable Goods Orders June 2.7% -0.8%
Durables Ex Transportation June 0.5% 0.3%
Capital Goods Orders Nondef Ex Air June 0.5% 0.2%
Capital Goods Ship Nondef Ex Air June 0.1%
Advance Goods Trade Balance June -$65B -$65.9B
Friday, July 28: GDP Annualized Q/Q 2Q17 2.6% 1.4%
Core PCE Q?Q 2Q17 2.0%
Employment Cost Index 2Q17 0.6% 0.8%
Consumer Sentiment July 93.2 93.1
Source: Bloomberg


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Kevin Caron, CFA, Senior Portfolio Manager

Chad Morganlander, Senior Portfolio Manager

Matthew Battipaglia, Portfolio Manager

Suzanne Ashley, 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).