Volatility returned to markets last week as the Dow Jones Industrial Average pared gains for the year. For the week, the index dropped roughly 4% reducing the one-year price gain to 28%.

Interestingly, the pickup in volatility was not accompanied by negative economic reports, a flattening yield curve, a widening of corporate spreads, or a cut in profit forecasts. The January employment report showed a net addition of 200,000 jobs and a 2.9% jump in hourly wage growth. Private payrolls are up a healthy 1.7% from a year ago, well above the 1% “stall rate” that has foreshadowed recession in the past. The yield spread between the Moody’s Baa corporate bond index average yield and the 10-year U.S. Treasury bond actually narrowed to 132 basis points (1.32%) versus 1.42 basis points (1.42%) a week ago. This narrowing suggests that bond investors appear to be more confident about corporate finances. The 10-year / 3-month U.S. Treasury yield spread rose to 136 basis points (1.36%) from 124 basis points (1.24%) a week ago. Lastly, analysts average S&P 500 earnings forecast for the next twelve months rose last week to $157.39 from $156.03 and is up from $132 a year ago. Simply put, last week’s pullback was not accompanied by any appreciable deterioration in “fundamentals.”

Last week’s 3.8% decline in the S&P 500 is hardly unheard of, although it hasn’t been seen recently. Since 1926, there have been more than 230 weekly declines of 3.8% or better. However, it has been over 107 weeks since we last saw a weekly drop of this size, and the S&P 500’s return has been nearly 50% since then. The long history of stock market returns shows again and again that stock values are ultimately tied to the size of the underlying economy. The chart below shows the value of the S&P 500 compared to its long-run trend over a very long period of time.

We continue to see signs of synchronized global economic growth (chart, below). The pattern of coordinated growth has been supported by a positive, but moderate, degree of credit expansion. According to data from the Bank of International Settlements, the year-over-year change in core debt to the non-financial sector rose 2.9% across advanced economies and 3.1% across emerging economies through the second quarter of 2017. This represents a pickup in credit creation in advanced economies from -2.5% growth in 2014, and a moderation in emerging markets from 13.1% growth in 2013. China’s credit growth has slowed to 4.3% growth from 22.9% in 2013. Underlying steady and coordinated economic growth supported a nearly $30 trillion rise in global stock market values to $85 trillion since the global slowdown of 2014-2015 came to an end.


Date Report Period Survey Prior
Monday, Feb 5: ISM Non-Manufacturing Index Jan 56.5 55.9
Tuesday, Feb 6: International Trade Balance Dec -$52b -$50.5b
JOLTS Dec 5.879m
Wednesday, Feb 7: No Economic Data
Thursday, Feb 8: Weekly Jobless Claims 2/3 235k 230k
Friday, Feb 9: Wholesale Inventories Dec 0.2% 0.2%
Wholesale Trade Dec 1.5%
Source: Bloomberg


Based on shorter-term expectations, the “tactical satellite” allocation within portfolios is:

Overweight Stocks vs. Bonds


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.

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