Barometer

Executive Summary: The second quarter brought a surge in stock values predicated on three critical assumptions. First, fiscal and monetary measures would be sufficient to support an economy suffering a tremendous hit. Next, the economy could begin a process of “reopening” and avoid a second wave pandemic shutdown. Finally, progress will be forthcoming toward a treatment or vaccine for COVID-19. While the future could always play out differently than expectations, equity markets seemed willing to focus on positives, rather than lingering unknowns, throughout most of the second quarter.

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What a Quarter

The second quarter saw stocks roar back from March losses. Global shares rose 38%, and high yield corporate bonds rose 20%. Long-term Treasury bonds were flat, and gold was up 15% (chart, below). The rally began after global stocks fell by one third from February 19 through March 23 as COVID-19 spread outside China, and shutdowns began. Since March 23, markets focused on measures taken to deal with the pandemic and its effects on the economy. A $2.2 trillion stimulus package and extraordinary central bank actions triumphed over fear and uncertainty. Volatility reigned throughout the first half of this year….

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Viewpoint 2020

Worries over rising rates and trade faded in 2019, prompting sizable gains in both bonds and stocks. Global growth seems to be firming and the United States is exhibiting stronger growth than most other developed nations as we start 2020. Low interest rates, rising wages, and record wealth is driving growth, but above average valuations reduce return expectations. This report covers Washington Crossing Advisors’ long-run views as we head into 2020. These top-down views are central to our tactical asset allocation decisions and recommendations.

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WCA fundamental conditions barometer increases slightly in October. Tactical asset allocation sees a small increase in equity versus bonds.

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THE WEEK AHEAD Is A Turn At Hand? If the U.S. expansion makes it to March, it will match the 1990s expansion as the longest on record. But the last few months have seen a slowing in global growth and a pickup in market volatility. Even though the current data flow remains mixed, global growth could improve because worries over trade and tightening monetary policy have faded and policy changes suggest stabilization. Our WCA Fundamental Conditions Barometer (chart, below), which measures broad changes in the growth outlook, improved slightly in the past month, but remains at levels suggesting some continued…

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Viewpoint 2019

Against a backdrop of worry over trade and rising interest rates, the United States economy continues to perform well. While equity markets generally declined in 2018, investors in the United States generally fared better than overseas. Moreover, most companies saw revenue, profits, and dividends grow in 2018, and we expect more to come in 2019. This annual Viewpoint, along with quarterly updates, provides an organized way of looking at the economy, financial markets, and your portfolio. The full report is available by clicking the link below.

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Although domestic growth remains strong, the outlook for growth in other parts of the world has weakened. Global Growth Weakens Global growth is weaker than anticipated in May, said the Organization for Economic Cooperation and Development (OECD) last week in their latest Economic Outlook. Trade tensions, tightening financial conditions in emerging markets, and political risks could all further dampen the outlook according to the report. The OECD trimmed their 2018-2019 global economic growth outlook by -0.1% to 3.7%, with rising differences across countries. While the United States remains steady, the OECD sees weaker growth throughout most of the world. Confidence…

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WASHINGTON CROSSING ADVISORS THE WEEK AHEAD Against a good global backdrop, Turkey reminds us that risk still exists. So Far… So Good… Our WCA Fundamental Conditions Barometer remained stable over the past month (chart A, below). This is a good sign for the economy and markets. Because performance has firmed up, we have stopped cutting equity exposure, and remain tactically tilted toward stocks in Conquest tactical ETF portfolios. Chart A If we drill deeper into the barometer, we can get a better understanding of what is going on. The barometer has about one-third weighting in market based indicators of “risk…

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THE WEEK AHEAD A move in the right direction? WCA PORTFOLIO INSIGHT After five months of slippage, the WCA Fundamental Conditions Barometer (chart, below) increased last month. The barometer takes into account market measures of risk appetite, indicators of U.S. economic health, and several inputs on conditions overseas. Trends in risk appetite are generally positive, but less robust than a six or nine months ago. By and large, most trends concerning the domestic economy, such as capital goods orders, employment, and earnings trends, are also quite good. We can’t call one month’s improvement a trend, but the interruption of the…

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THE WEEK AHEAD As we head into mid-year, we update some of our Long-Term Capital Market Assumptions that feed into the CONQUEST and Dynamic Strategies TACTICAL portfolios. WCA PORTFOLIO INSIGHT Long-Term View We start our analysis by observing what returns are available in markets. An investment in a 90-day U.S. Treasury bill today will earn an annualized return of 1.9%, for example. A year ago, this same Treasury bill offered a return of 1%. The increase is due to the Federal Reserve’s(Fed) deliberate effort to raise policy rates. While not a historically high rate by any measure, the direction is…

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THE WEEK AHEAD Earnings are up, but so too are worries over trade. We discuss this year’s changing market, and tactical adjustments WCA has made in CONQUEST and Dynamic Strategies portfolios. WCA PORTFOLIO INSIGHT Most of the surge in profit forecasts can be directly linked to last year’s tax cut. Profit forecasts for the S&P 500 jumped right after passage of President Trump’s Tax Cuts and Jobs Act (TCJA). The TCJA reduced the corporate income tax rate to 21% from 35%, instantly adding a ~20% tax “bump” to S&P 500 after-tax profit forecasts (blue line in graph). Some better economic…

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THE WEEK AHEAD Flush earnings still help, but higher interest rates and trade concerns hurt the bull case for stocks. MACROECONOMIC INSIGHT Not much happens when businesses, investors, and consumers decide to pull in their horns. Fortunately, the past couple of years have had most people feeling relatively optimistic about the outlook. Consumers are benefitting from full employment, rising wages, and increased wealth. Business owners and investors are reaping the benefits from a growing economy and large profits. For the past several years, no attractive “risk free” investment alternative existed to compete against riskier assets. One way to think about…

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WASHINGTON CROSSING ADVISORS THE WEEK AHEAD WCA Barometer holds steady for second month as markets weigh growth, inflation, and rates. MACROECONOMIC INSIGHT Strong global demand has driven growth and may now be pushing up against supply constraints. Bottlenecks are leading to higher prices and raising concerns about inflation. Cash and bond markets have been pricing in expectations for firmer inflation and higher policy rates. Consider global commodity prices. Oil, aluminum, wood pulp, and lumber prices all began to spike a little over a year-ago. Oil is up 20%, aluminum is up 15%, pulp is up 25%, and lumber is up…

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THE WEEK AHEAD Markets reprice risk as trade and interest rate risks emerge. MACROECONOMIC INSIGHT The Dow Jones Industrial Average lost more than 1,400 points last week, against a backdrop of trade actions and reprisals. Buying appears to be on hold, at least for now, following a year or more of solid gains for stocks. It is always hard to pinpoint which, the chicken or the egg, comes first when talking about markets and the economy. To our eye, the two work in conjunction and feed back into each other. We all recognize that an improving economy tends to promote…

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THE WEEK AHEAD Federal Reserve meets this week and is widely expected to deliver another rate increase. MACROECONOMIC INSIGHT We are seeing a small downshift in the pace of growth, based on incoming data. While not outright deterioration, there appears to be some softening in global economic momentum. This is not yet a major concern of ours, but some mixed signals have caught our attention. Here is a partial list of some of some of the items that have shown recent weakness: 1)     A three month decline in Chinese manufacturing surveys; 2)     A three month decline in German Business confidence;…

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