The data supports an economy gathering momentum into the third quarter.  This week brings some additional data on retail sales and consumer sentiment.


The July employment report was strong.  Jobs rose 255,000 in the month, adding to the 292,000 increase in June.  These increases contrast sharply with the 84,000 average job gain in April and May.  The strength in jobs suggests income and spending are also picking up.  The Federal Reserve of Atlanta now estimates the economy will grow 3.8% in the third quarter.  Growth averaged just 1% in the fourth quarter of 2015 and first quarter 2016.

Stronger growth lessens recession odds and bolsters the case for rate hikes.  If data remains strong, the case for the Federal Open Market Committee (FOMC) to hike in September will increase.  The consensus opinion today is that the Federal Reserve (Fed) will hike once more this year, likely in December. So far, the pickup in growth is not moving the needle much for corporate earnings.  According to FactSet, S&P 500 earnings are set to decline 1.7% year-over-year through the second quarter.  Third quarter expectations are also for a year-over-year drop of 1.7%.  For the full year, earnings are forecast to decline 0.3%.  Of course, the energy sector, whose earnings are down 72%, is a significant drag.  Excluding energy, full-year earnings are expected to increase 2.8%.

Based on forward 12-month earnings, the price-to-earnings ratio for the S&P 500 is 17x.  This valuation level is about 16% above the 10-year average, indicating somewhat elevated valuations.  This heightened valuation is accompanied by record-low interest rates.  We have lowered our long-run return expectation to account for higher-than-average equity valuations.


Date Report Period Survey Prior
Monday, August 8:
Tuesday, August 9: NFIB Small Business Optimism Survey July 94.5 94.5
Productivity Q2 0.5% -0.6%
Unit Labor Costs Q2 1.8% 4.5%
Wednesday, August 10:
Thursday, August 11: Weekly Jobless Claims August 6 265K 269K
Import Prices July -0.4% 0.2%
Export Prices July 0.8%
Friday, August 12: Retail Sales July 0.4% 0.6%
Retail Sales (Less Autos) July 0.2% 0.7%
Producer Prices July 0.1% 0.5%
Producer Prices (Core) July 0.2% 0.4%
Business Inventories June 0.1% 0.2%
Consumer Sentiment August 91 90


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.

The WCA Fundamental Conditions Barometer measures the breadth of changes to a wide variety of fundamental data.  The barometer measures the proportion of indicators under review that are moving up or down together.  A barometer reading above 50 generally indicates a more bullish environment for the economy and equities, and a lower reading implies the opposite.  Quantifying changes this way helps us incorporate new facts into our near-term outlook in an objective and unbiased way.  More information on the barometer is found in our latest quarterly report, available at

Kevin Caron, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst

Suzanne Ashley, Junior Analyst

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