Analysts have come to believe that S&P 500 companies failed to grow earnings during the just completed first quarter. Moreover, the forwards market for short-term interest rates sees no further U.S. rate increase on the horizon. Global bond markets are, once again, priced with negative yields in Germany, Japan, Spain, and France. The U.S. Treasury curve is flirting with inversion, where long-term rates fall below short-term rates, which can be a recessionary signal. Despite this backdrop, investors returned to equities in the first quarter of 2019.

A Turning Point?

Undoubtedly, the International Monetary Fund will weigh in on the state of global growth when they meet this week. It is likely they will highlight the negative impact that trade tensions have had on their outlook. We also expect to hear a good deal about a slump in European activity. Last week, we saw that the IHS Markit Eurozone purchasing manager’s index plummet to 47.5 in March from 49.3 in February, the largest drop in six years. Consistent with that reading was Germany’s February manufacturing report which had orders down 8.5% year-over-year. The last time orders fell by this amount was at the start of the 2008-2009 recession. Europe is undergoing a significant growth downshift from where they were a few months ago.

For our part, we recognize that global growth was slower early in 2019 than a year ago, and therefore, less likely to reach our 3.5% long-run target this year. However, we could be starting to see some signs of firming in the United States’ and Chinese economies. For example, the U.S. Institute for Supply Management said its monthly index of manufacturing activity rose to 55.3 in March from 54.2 in February. Order rates were especially strong which augurs well for future domestic production. Similarly, an official Chinese purchasing managers index rebounded to 50.5 from 49.2 in February, jumping to a six-month high. An upward bias to commodity prices also suggests some expectation of better global growth ahead.

WCA “Barometer” Spikes

Since last summer, China cut taxes, lifted spending, and eased monetary conditions. For its part, the Federal Reserve also completed an about face regarding their stance on U.S. monetary policy — convincing markets that no further rate increases are in the offing. Speculation that a trade deal between the United States and China might be struck soon is also engendering a sense of hope that global growth could soon lift. The net effect of all this is an easing of financial conditions and a more bullish environment for stocks. After months of slippage, our WCA Fundamental Conditions Barometer (chart A, below) spiked in March. Our near-term forecast path for the barometer is centered near 55 (see chart). Therefore, equity exposure has been increased to 55% from 35% in the satellite portions of Conquest Tactical ETF Portfolios.

Chart A

Source: WCA

Conclusion

After months of slippage, it is possible that the outlook for global growth just might be approaching a turn for the better. Tactical positioning around a potential for improvement in the months ahead lead us to lift equity exposure to a modest overweight.

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client Portfolio Manager
Suzanne Ashley, Analyst

(973) 549-4168

www.washingtoncrossingadvisors.com
www.stifel.com

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.

Washington Crossing Advisors LLC is a wholly owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF).