Monday Morning Minute 082916
Global growth is picking up. At Jackson Hole, Janet Yellen said the case for a rate increase is stronger, given the recent pickup in data. It appears that earlier concerns that Brexit would hurt near-term growth were misplaced. Weak productivity growth, a clouded earnings picture, and lackluster investment remain long-term concerns. This week’s data will provide further insight into employment and manufacturing trends.
The Federal Reserve of Atlanta’s “GDP Now” estimate of Q3 GDP is 3.6%. Private forecasters seem to be raising their growth forecast toward 3%. This is a big improvement from last winter’s 1% growth environment. Steady consumer demand, coupled with less pessimism about emerging markets and commodities, lessens risk. Last month’s retail sales grew north of 5% on an annualized basis, for example. The data coming out of Europe in the weeks following Brexit has not been all that bad, either. Europe’s purchasing managers surveys still point to expansion in manufacturing through August.
The pickup in recent data makes a recession less likely in the near-term horizon. This again led us to nudge higher the portfolio equity allocations this month. Long-term return expectations, which drive the core allocations in portfolios, are under pressure by low starting yields for bonds, weak global growth, and elevated equity valuations. The S&P 500 now trades at 16.9 forward earnings versus a 10-year average of 14.3 (18% premium). On the bright side, the expected earnings figure has been on the rise. Today, analysts expect S&P 500 operating earnings of $129 over the next 12 months. Earlier this year, that figure was just $123.
The forward view on equities just got better-looking, given the bounce in growth now underway.
ECONOMIC RELEASES THIS WEEK
|Monday, August 29:
|Dallas Fed Manf. Activity
|Tuesday, August 30:
|S&P Case-Shiller HPI 20-city, SA – M/M
|S&P Case-Shiller HPI 20-city, NSA – M/M
|S&P Case-Shiller HPI 20-city, NSA – Y/Y
|Wednesday, August 31:
|ADP Employment Report
|Pending Home Sales M/M
|Pending Home Sales Y/Y
|Thursday, September 1:
|Weekly Jobless Claims
|Domestic Vehicle Sales
|Total Vehicle Sales
|Unit Labor Costs
|PMI Manufacturing Index
|Construction Spending M/M
|Friday, September 2:
|Change in Nonfarm Payrolls
|Labor Force Participation Rate
|International Trade Balance
|Factory Orders M/M
ASSET ALLOCATION PORTFOLIO POSTURE
LONG-RUN STRATEGIC POSTURE: Our long-run forecasts lead us to overweight large cap domestic growth stocks, high-yield corporate bonds, and gold in the diversified “core” of portfolios. Underweight positions in “core” are long-term U.S. Treasuries, foreign developed equities, and REITs. Meanwhile the equity allocation in the short-term tactical “satellite” portion of portfolios was increased to 40% equity / 60% fixed income from 33% equity / 66% fixed income. Mid-year rebalancing took place at the end of June to reflect updated long-run forecasts.
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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.
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Kevin Caron, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst