THE WEEK AHEAD

While markets are speculating about Federal Reserve appointments and handicapping tax reform, the earnings season kicks into high gear.

MACROECONOMIC INSIGHT

The earnings season kicks into high gear this week as markets remain focused on happenings in Washington. Roughly 40% of S&P 500 companies are set to report third quarter earnings this week and expectations are high. Strong economic performance, despite hurricane impacts, underlie optimistic analyst forecasts for corporate earnings. For the full year, 2017 S&P 500 operating earnings are expected to increase 9% from 2016, and high growth is reflected in above average valuations. The S&P 500 trades at 17.9 times expected earnings, compared with a 10-year average of 14.1 times according to FactSet Research.

Record stock prices and strong earnings growth are supported by a better economic performance. The third quarter GDP report, due out this Thursday, is expected to show continued above-trend growth. Economists surveyed by Bloomberg expect 2.6% growth, and the Atlanta Fed’s “GDP Now” forecast calls for 2.7% annualized growth. Our own WCA Fundamental Conditions Barometer, which broadly measures changes in market and economic conditions, appears to be firming slightly as we start the fourth quarter (chart, below).

Sustained market confidence, continued growth, and better earnings pushed our forecast path higher for our barometer. We now see the barometer remaining near 65 between now and year-end. The dark line through the blue shaded forecast horizon measures our “base case” forecast. This forecast lies at the middle of a broader range of less likely forecasted outcomes (shaded area). Importantly, the base case view is better than last month’s forecast, suggesting an improvement in the near-term view for economically sensitive assets.

 

ECONOMIC DATA THIS WEEK

Date Report Period Survey Prior
Monday, Oct 23: Chicago Fed National Activity Index Sep -0.10 -0.31
Tuesday, Oct 24: PMI Composite Flash Oct — 54.8
Wednesday, Oct 25: Durable Goods Orders Sep 1.2% 2.0%
Durable Goods Ex Transportation Sep 0.4% 0.5%
Cap Goods Orders Nondef Ex Air Sep 0.2% 1.1%
Cap Goods Ship Nondef Ex Air Sep — 1.1%
New Home Sales Sep 555K 560K
New Home Sales M/M Sep -1.0% -3.4%
Thursday, Oct 26: Weekly Jobless Claims Oct 21 235K 222K
Advance Goods Trade Balance Sep -$63.9B -$62.9B
Pending Home Sales M/M Sep 1.0% -2.6%
Pending Home Sales Y/Y Sep — -3.1%
Friday, Oct 27: GDP Annualized Q/Q 3Q2017 2.6% 3.1%
Consumer Sentiment Oct 101 101.1
Source: Bloomberg

ASSET ALLOCATION PORTFOLIO POSTURE

Based on shorter-term expectations, the “tactical” allocation within portfolios is equally weighted between bonds and stocks.

 Client approved reports and commentaries click here

 

Kevin Caron, CFA, Senior Portfolio Manager

Chad Morganlander, Senior Portfolio Manager

Matthew Battipaglia, Portfolio Manager

Suzanne Ashley, Analyst

(973) 549-4052 www.washingtoncrossingadvisors.com www.stifel.com

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Disclosures

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.

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