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Many managers use textbook financial ratios such as return on equity, debt to equity, and earnings per share variability to evaluate the quality and value of a company. However, these metrics can be easily manipulated by a company’s management and misused by index providers and rating agencies. For example, the return on equity ratio can be increased overnight by issuing debt and using it to buy back stock rather than investing in the business to promote growth. This can create an illusion of higher profitability without actually improving the company’s business operations. Distortions Caused by Share Buybacks To better understand…
In 2018-2019, real estate company Zillow showed “for sale” inventory of U.S. homes between 1.2 and 1.4 million units. After the pandemic in 2020, that “for sale” inventory began a sharp decline to 440 thousand units in March 2022. In other words, in March, the supply of homes was about 1 million units short of, or 60-70% below, pre-pandemic levels based on Zillow’s data. At the same time supply was falling, demand was surging. Existing home sales surged by 1 million units above normal in 2020-2021, and new mortgages for purchases surged 40%. Remote work trends, federal stimulus, and record-low,…
Have you noticed more crowded roads and airports lately? The benefits of reopening are now seen across many sectors, and the municipal bond market is paying attention. This report explores how the process of reopening the economy is impacting municipal bond issuers and investors. Highlights The Muni curve steepened in the third quarter, slightly underperforming U.S. Treasuries, in very quiet trading activity. Flows into Muni Mutual Funds continued their torrid pace as increased taxes become more certain. The reopening economy has benefited Munis, too. Part 1 of our Muni Market Education Series: Why the High Coupon?
Discusses outlook amid the current COVID-19 and zero-interest-rate environment. Kevin describes WCA’s rationale for emphasizing flexibility in portfolio companies. Quality, durability, and flexibility remain “watchwords” for investing as debt rises and the credit cycle ages. The interview starts at 27:41
After remaining unchanged for much of June, Municipals rallied in July, with yields falling to new record lows across most of the curve. Munis outperformed Treasuries and Corporates and the Muni to Treasury ratio, a common valuation metric that has been essentially meaningless since the market dislocation in March, has returned to more normal levels. Muni Mutual Fund inflows have continued for 11 consecutive weeks and cash from coupon and maturity payments led to strong demand, as we have expected. While rates are at historic lows, the curve remains steep, which offers an opportunity in the longer end of the…
This is a second part of a series on China and trade. To read part one, click here. CONQUEST update: Last week we raised gold to overweight and high yield to underweight in the core portion of portfolios on rising geopolitical and trade concerns. We’ve pointed out that China owes much of its growth to investment (not trade). As discussed last week, much investment is being subsidized by Chinese households. These subsidies have allowed China to grow well over 7% for many years. From the early 1980s, when China had very low levels of investment, to today, as investment rates…
A Year of Churn In the past year, forecast earnings for S&P 500 companies are up just about 9%, slightly above the S&P 500’s 5% year-on-year advance. The S&P 500 earnings yield, or inverse of the price-earnings-ratio, now stands near 6.25%, up from 5.9% a year ago. By comparison, the S&P 500 earnings yield is 385 basis points (or 3.85%) higher than the 2.4% yield on the 10-year U.S. Treasury bond. A year ago, the S&P 500 earnings yield spread over Treasuries was about 290 basis points (2.9%), so today’s 385 basis point spread points to somewhat better valuations for…
The S&P 500 returned 13.7% in the first quarter, the best quarterly performance since 2009. This follows almost a 20% drop in the S&P 500 during the fourth quarter. The concerns about global growth and rising interest rates, which contributed to last fall’s market selloff, appear to be easing. The WCA Fundamental Conditions “Barometer” advanced sharply in the past few weeks as signs emerged that growth may be picking up in the United States. Accordingly, equity exposure was increased and bond portfolio duration reduced across tactical asset allocation models. Full Report Click Here
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…
As has been the case for the past year, worries over global growth continue to dog markets. Last Friday’s large miss on Germany’s purchasing managers index is more evidence that global growth has turned sour (Chart A, below). Some hoped that a better result would be seen from Germany given that order rates have held up. However, the 44.7 reading on the index is far below 50, creating cause for further concern about Europe. The miss follows earlier warnings on growth from the European Central bank, who recently issued a cut to their outlook. Bloomberg’s estimate of 2019 German growth…
Investor expectations are usually anchored by central bank expectations which is why central bank statements deserve much attention. This Wednesday’s update on monetary policy from the Federal Open Market Committee (FOMC) is especially important given the FOMC’s recent pivot to “patience.” Market expectations are now set for an 85% probability of no further rate increases this year. The process of reducing short-term rate expectations, which began last fall, has now rippled through global financial markets, dampened volatility and helped buoy stocks so far in 2019. As the Federal Reserve gets ready to release an updated “dot plot” this Wednesday, the…
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…
Global Trends Remain Negative The contrast in performance between the U.S. economy and the rest of the world is a major theme these days. Since the beginning of 2018, a marked worsening of foreign conditions is obvious, and we expect our WCA Fundamental Conditions Barometer to register weakness when it is updated next week. Globally, we see energy and industrial metals trending lower. In Asia, we see financial conditions tightening as Chinese manufacturing fades. Brazilian industrial production has slid. European growth is slowing as financial conditions and the business sentiment turn down. The foreign piece of the global outlook is…
Some Start of Year Housekeeping At the start of each year, we take some time to lay out the expectations that drive tactical decisions in the CONQUEST portfolios. We also engage in a few “housekeeping” activities to keep portfolios properly aligned with their respective benchmarks. The 2019 Viewpoint is now available and is a great resource to accompany the CONQUEST Tactical ETF portfolios. To order hard copies of the report, please drop us an email with the number of reports you want sent to you. CONQUEST 2019 Housekeeping Increasing Allocation to “Satellite”: As we discuss in our 2019 Viewpoint, we…
Closing out short-duration tactical tilt as curve flattens. Ahead of the Curve We increased duration in portfolios as the long-term Treasury yields fall below 3%. Throughout the year, we pointed out that foreign conditions were weighing on the outlook. Growth expectations are lower now than in the beginning of the year, and many stock markets around the world are negative for the year. Bulls appear to be pulling in their horns amid concerns over trade, Brexit, and higher short-term interest rates. While Treasury bond yields have been rising for most of the year, that trend now appears to have…
An update on CONQUEST tactical portfolio strategy as we get set to close out the year. How About the Economy? Why should an investor care about keeping track of the economy? Isn’t it enough to just create a “set it and forget it” portfolio? We think investors should care about the economy for two reasons. First, theups and downs of the economy creates risks to avoid and opportunities toexploit. Second, the size of the economy determines the value of the stockmarket and drives long-run return. This is why we, as active managers, devoteso much time evaluating economic data. Near-Term…
November’s Data If all you did was focus on the United States’ economy, you would conclude that October was a very good month. Over the past two weeks we learned that in October: Workers hourly wages shot up 3.1% from a year earlier, the best performance in a decade; U.S. Manufacturing activity remains solid (the Institute for Supply Management’s Purchasing Manager’s Survey is solidly in the 55-60 range); Core domestic retail sales are up a whopping 5%, year over year, continuing a very strong upward trend. These sorts of readings are unmistakable positives for the United States’ economy, and in…
We update our WCA Fundamental Conditions Barometer for October and consider what might be driving some of the recent pickup in equity market volatility. Foreign Conditions Remain Weak Evidence continues to mount that much of the global economy is coming under pressure. Last week brought news that China’s manufacturing sector worsened in October, along with output in September in South Korea,Japan, and Taiwan. A chill is also taking hold in Europe, evidenced by a halving of the third quarter growth rate, just as inflation is picking up.Emerging markets finished out October with losses, evidencing growing doubts about growth. Our WCA…
Ten Years After Looking back over the past ten years, the U.S. economy and stock market emerged as unlikely winners. A decade ago, Lehman Brothers and dozens of other financial firms were in the midst of collapse. In short order, the financial system and economy entered into a very dark period, culminating in a deep and painful recession. Equity markets fell by over 50% and 8.7 million Americans lost their jobs as the unemployment rate soared to 10%. From those depths, a recovery took hold and led to an expansion which endures today. Employment rolls are again full, as 20…
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…
Full Steam Ahead The Federal Reserve meets September 25-26 to discuss next steps for monetary policy and interest rates. Firming inflation, strong growth, and low unemployment all point toward another increase in the federal funds rate. If the Federal Reserve does raise rates as expected, the federal funds rate will be at 2.25%, which will be above the central bank’s forecast inflation rate, but well below where rates peaked in past tightening cycles (chart, below). Real Rates are Back With short-rates equal to inflation, the “real” interest rate is no longer negative. How high the rate actually moves above the…
THE WEEK AHEAD We take a look at market valuations, return patterns, and the health of the economy for clues about what might come next. Signs of Growth Are “Full Speed Ahead” The economy continues to show signs of strong growth. Friday’s August jobs report showed strength in new jobs and wages. Not only did job growth exceed expectation at 201,000 net new jobs, but incomes grew near a 5% annualized pace. Moreover, the quarterly data on output and productivity is encouraging, too. According to the Bureau of Labor Statistics, output rose 5% in the second quarter, with increased productivity…
THE WEEK AHEAD Against a good global backdrop, Turkey reminds us that risk still exists. THE CASE OF TURKEY Although the background for growth, particularly in the United States, appears good, we are reminded that the world is not without risk. The latest example of an economy in crisis is Turkey. After a period of heady growth, the country has fallen victim to a sliding currency, skyrocketing inflation and interest rates, and capital flight. The chart below shows the slide in the currency (orange line, right scale) superimposed on top of a declining stock of currency reserves (blue bars, left…
Our 2018 Viewpoint begins on an optimistic note. Growth continues to pick up by most accounts, businesses are again investing, and asset values are near records. Confidence necessary for risk taking is apparent, and inflation remains at bay. On the other hand, we are now confronted with higher valuations in many asset classes, which we feel should eventually weigh on long-run returns. This annual Viewpoint, along with quarterly updates, provides an organized way of looking at the economy, financial markets, and your portfolio. Full Report Click Here
THE WEEK AHEAD We update our barometer and tactical positioning for June. MACROECONOMIC INSIGHT Our forecast path for the WCA Fundamental Conditions Barometer declined in June (chart, below), and now sits just below 50. The decline in the index from above 70 at the start of the year suggests that risk appetite has waned somewhat. Accordingly, we trimmed back the equity exposure in the satellite portion of tactical portfolios to 45% from 55% last month. Why is this happening? A closer look at the data shows some evidence of softening in Europe, a build in domestic inventories, wider credit spreads,…
The WCA barometer holds steady through April, tactical stock / bond mix unchanged. MACROECONOMIC INSIGHT The last month’s data show signs of resilience following a sharp spike in volatility in February and March. The WCA Fundamental Condition Barometer (Graph 1, below) shows a forecast path that remains above 50, but is declining. Our forecast base case is unchanged from last month, suggesting some stability after some weakening trends in February-March. Thus the near-term prospects for continued growth are good, but some moderation looks reasonable. This forms the primary justification for our near-term view to be tactically overweight equities in asset…
THE WEEK AHEAD We look at how rising interest rates could harm returns for some highly-leveraged firms. MACROECONOMIC INSIGHT Some firm are paying more to borrow money, which is weighing on stock price performance. The world’s most widely used benchmark for pricing loans and specifying financial contracts is the London Interbank Offered Rate, or LIBOR. The rate for 30-day LIBOR stands near 2.4%, about double the level of a year ago, and most of the rise occurred in the last four months (chart, below). Over $5 trillion of business and consumer loans reset relative to LIBOR, making this a key…
THE WEEK AHEAD Volatility continues amid headline noise on trade. MACROECONOMIC INSIGHT Recent headlines have been enough to unnerve even the most seasoned investor. The tension between the United States and the rest of the world seems to increase daily. On Friday, the United States threatened to levy another $100 billion of tariffs on Chinese imports, which would bring the total to $153 billion. Because the United States exported only $130 billion to China last year, it may prove tough for China to reciprocate in kind. While much of this is likely posturing ahead of some final agreement, the tone…
THE WEEK AHEAD Busy week ahead for data as we begin to get an early read on February data. MACROECONOMIC INSIGHT Since early 2016, incoming data has told the story of improving global growth. Today, our WCA Fundamental Conditions Barometer (below) remains above 50 supports a bullish case. We attribute the 30% rise in U.S. stock values to improving earnings, which in turn, reflect better growth. Further augmenting the earnings outlook, and the run-up in stock values, was last year’s tax cut. That cut will begin to filter into reported profits in the months ahead, and into withholding tables very…
THE WEEK AHEAD Growth story continues to lift equities, but faster growth is beginning to stir concerns over rates and inflation. MACROECONOMIC INSIGHT We have seen constant upward revisions to earnings and growth estimates for the last year, creating the backdrop for good equity market performance. A combination of easy monetary policy, improving growth, and strong sentiment are driving continued upside surprises for growth. Leading economic indicators remain strong, employment trends are solid, business investment is picking up, and order rates for durable goods are surging. Our own WCA Fundamental Conditions Barometer (below) surged through the later part of 2017…
WASHINGTON CROSSING ADVISORS THE WEEK AHEAD A relatively quiet week for economic data, but new records on the Dow and S&P 500 have us thinking again about the “big picture.” MACROECONOMIC INSIGHT With the Dow just surpassing 25,000 and the S&P 500 crossing 2,700 for the first time in history last week, we thought it makes sense to pause and take a step back. As we point out in our Viewpoint 2018, we see the growing economy as the key driver of the market’s record-breaking performance, and there is clear evidence that growth continues. However, we must also point out…
Data supports market momentum into the new year: Portfolio manager from CNBC.
Jim Lowell, Adviser Investments, and Kevin Caron, Washington Crossing Advisors, provide their outlook on the markets and economy in 2018. The only question for us is at some point valuations are beginning to look a little rich, says Caron.
THE WEEK AHEAD A busy week ahead including a Federal Open Market Committee (FOMC) meeting, announcement on a selection for next Federal Reserve (Fed) Chair, possible release of some details for the tax plan, and a look at the September employment situation. MACROECONOMIC INSIGHT President Trump is said to be leaning toward naming current Fed governor Jay Powell as the next Fed chair. The President has previously indicated he will make his decision before he leaves on his next foreign trip next week. Friday’s employment report is expected to show the economy added 308,000 jobs in October and the unemployment…
We prepare to end 2017 with consumer and investor confidence running high, but we are mindful of potential longer-term speed bumps. Portfolios are neutrally weighted between stocks and bonds as we enter the fourth quarter. Full Text Here
THE WEEK AHEAD We update our input tables to our long-run forecast and tactical top-down investment process. MACROECONOMIC INSIGHT Each quarter, we update a series of tables that lie behind our long run tactical asset allocation decisions. These are all forward-looking assumptions and are inherently imperfect estimates of the future. Still, these base-case assumptions are necessary and important inputs that form the basis for our top down investment process. The ratcheting down of our WCA Fundamental Conditions Barometer (currently near 50 vs. 75 at the start of the year), faster than expected rate increases, stubbornly low inflation, improving overseas trends,…
THE WEEK AHEAD Markets (and the Federal Reserve (Fed)) get a read on the health of the labor market as the September Employment Report is released on Friday. MACROECONOMIC INSIGHT Friday’s report is expected to show that the economy added 70,000 jobs while the unemployment rate remained steady at 4.4%. While much airtime will be spent dissecting those headline figures, we want to focus on two other aspects of this report: the change in private payrolls (Chart A) and the yearly change in average hourly earnings (Chart B). While the trend for both of these figures is generally positive, recently…
WASHINGTON CROSSING ADVISORS THE WEEK AHEAD Data points to above trend growth, below trend inflation, and no Fed action on rates. MACROECONOMIC INSIGHT Global and domestic growth continues to run above our long-run forecasts. A wide range of data suggests the global economy is performing well. For example, last week the European Central Bank raised their 2017 Euro-area growth forecast to 2.2%, the fastest pace since 2007. Meanwhile, the Federal Reserve Bank of Atlanta’s “GDP Now” model is tracking third quarter domestic growth near 3%. Japan is even growing at a healthy 2.5% pace, and China just reported a 7%…
THE WEEK AHEAD The FOMC meets this week and is expected to deliver a rate increase. Wednesday’s announcement will be associated with a summary of economic projections and a press conference by the Chair. MACRO VIEW The return on cash hasn’t been much to write home about recently. As the economy picks up, expectations for short-term interest rates are perking up (graph below). A year ago, markets were pricing in an expectation for a 1.2% short-term interest rate by early 2019. Today, that same expectation is near 1.9%. As assumed cash returns rise, they compete against returns available on other…
THE WEEK AHEAD The improving growth theme gets tested again this week with data on factory orders and employment. MACRO VIEW We are expecting to see a strong start to 2017, followed by a period of moderation through the year. We expect consumption to grow at a 5% annualized rate through the first quarter with investment growing at a 10% pace. If correct, the rolling four quarter average growth rate for the overall economy will be trending near 2.5% growth (chart below). This forecast incorporates our expectation for a March interest rate hike and recent readings from our WCA Fundamental…
THE WEEK AHEAD We expect good reports this way on durable goods and manufacturing this week, consistent with other recent data points. The improvement in the business outlook is being clearly embedded in market expectations. MACRO VIEW It has been more than 90 months since the last recession. Expected tax cuts, infrastructure spending, and regulation are fueling consumer and business optimism. In turn, this optimism is helping lift the stock market to records. Given this, we want to spend a minute to remind ourselves how we got here. During the ’07-09 recession, the U.S. stock market had an average value…
THE WEEK AHEAD President Trump addressed Chinese and Japanese currencies last week and reiterated his call for a “level playing field” for currencies. This week we revisit China and emerging markets where we remain underweight in the diversified core of asset allocation portfolios. MACRO VIEW Emerging markets (EM) are delivering less growth than they used to, but remain risky. Chart 1 below shows how EM growth is converging with developed markets in recent years. Potential growth is dampened by slipping productivity (green) and capital investment (red). These factors explain most of the moderation in EM growth in recent years….
THE WEEK AHEAD Data continues to come in relatively strong with last week’s employment report offering mostly good news. MACRO VIEW The January data continued to post positive momentum, supporting the bullish case for stocks. Friday’s January employment report was not an exception. Nonfarm payrolls rose 227,000 and beat most economist’s expectations. This is higher than the 180,000-200,000 range we’ve become accustomed to see over the past several quarters. The unemployment rate ticked up to 4.8%, but remains near what many consider “full employment.” A closer look at private jobs reveals still healthy year-over-year growth. This measure, which ignores government…
THE WEEK AHEAD A surprise boost in optimism is impacting financial markets and has the potential to feed into growth as we start 2017. The WCA Fundamental Conditions Index ends 2016 on a strong footing, suggesting better growth through the fourth quarter. MACRO VIEW Today’s Monday Morning Minute will be our last weekly commentary of the year, and we would like to say thank you to all our readers. Our best wishes to you for a joyous holiday season and a prosperous 2017! Our final update is also a positive one for the stock market and the economy. Although the…
THE WEEK AHEAD A shortened week due to Thanksgiving. Markets to focus on durable goods, Trump transition, and upcoming Italy vote. MACRO VIEW The market’s recent reaction to a Trump victory adds fuel to what was already an improving fundamental backdrop (graph, below). How are fundamentals improving? For starters, the bottom-up S&P 500 12-month earnings forecast advanced from a monthly average of $123.52 in the first quarter to $129 currently. Risk appetite improved and higher-risk stocks and bonds both outperformed their lower-risk counterparts. Long-run inflation expectations firmed from 1.4% to 1.75%. A pickup in China’s economy, firming commodity prices, the…
THE WEEK AHEAD How the Trump win changes markets, the economy, and CONQUEST and DYNAMIC STRATEGIES portfolios. MACRO VIEW While light on details, the Trump economic vision is capturing the market’s attention. The sweep by Republicans came as a shock to markets, and President-elect Trump’s acceptance speech highlighted spending and tax cut initiatives that are welcomed as “pro-growth.” There is much still that needs to be worked out, and the devil is always in the details. If campaign promises are enacted as stated, sweeping changes to trade, taxes, government spending, and regulation are all on the table. Most proposals on…
THE WEEK AHEAD We look at credit, debt, and leverage given new data from the Federal Reserve (Fed). We conclude that private sector debt and leverage remain important contributors to both risk and growth. Elevated levels of private sector debt and leverage increase potential risks that should be addressed in portfolios as the cycle ages. MACRO VIEW Recent data from the Federal Reserve shows private sector debt remains elevated despite some household deleveraging. We continue to believe a relationship exists between private sector debt, the economic cycle, and equity market volatility, and that relationship is stronger today than years ago….
THE WEEK AHEAD Federal Open Market Committee (FOMC) rate decision, projections, and press conference Wednesday afternoon should garner significant attention and will Likely sets the stage for a December tightening. MACRO VIEW This week’s FOMC meeting should set the stage for a December hike. There is little in recent statements that lead us to believe a September tightening is in the cards. Data since July was generally positive, opening the door for a more balanced statement. Brexit failed to produce a worse case dislocation, and leading indicators appear resilient. The WCA Fundamental Conditions Index rose through the summer months, and…
Global growth is picking up. At Jackson Hole, Janet Yellen said the case for a rate increase is stronger, given the recent pickup in data. It appears that earlier concerns that Brexit would hurt near-term growth were misplaced. Weak productivity growth, a clouded earnings picture, and lackluster investment remain long-term concerns. This week’s data will provide further insight into employment and manufacturing trends. The Federal Reserve of Atlanta’s “GDP Now” estimate of Q3 GDP is 3.6%. Private forecasters seem to be raising their growth forecast toward 3%. This is a big improvement from last winter’s 1% growth environment. Steady consumer demand, coupled with…
The Federal Reserve (Fed) releases the minutes from July Federal Open Market Committee (FOMC) meeting on Wednesday. MACRO VIEW Credit spreads are tighter. Commodity prices are firmer. More stocks are participating to the upside. Financial conditions within the banking system are improving. These are some of the “high frequency” items that are on the mend this year. As this happens, equity markets are performing better. Our own WCA Fundamental Conditions Barometer (below) is telling a similar story. Around the time markets began to price in a less-hawkish Fed earlier in the year, conditions began to firm. Commodities ended their freefall. …
The data supports an economy gathering momentum into the third quarter. This week brings some additional data on retail sales and consumer sentiment. MACRO VIEW 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….
Friday’s July employment report is the big number this week. This indicator is a focal point for the Federal Reserve (Fed) and has been very erratic of late. The 6,000 job loss in May was shockingly poor, but it was followed by a better-than-expected 265,000 job gain in June. Will the real labor market please stand up? A Bloomberg survey reveals a street expectation of 171,000 jobs and a 4.8% inflation rate. MACRO VIEW Last week’s Gross Domestic Product (GDP) report showed an economy growing at just 1.2%. This headline figure will be revised further, but taken at face value,…
Britain’s decision to leave the European Union (EU) reflects widespread dissatisfaction with EU governance. The rejection of EU governance highlights the inherently unstable nature of the organization. If individual members experienced long-run benefits, defections would not occur. Instead, the people of Europe would press for a formal merger. If individual members become dissatisfied, these countries are likely to break away. Why would a dissatisfied and democratic country like the United Kingdom look to remain? Most, including us, believed the vote would lean toward maintaining the status-quo. This exit vote marks the first tangible step backward from the decades old vision…
The Doha oil talks concluded with a resounding thud over the weekend, as media sources reported an abrupt end to talks aimed at curtailing oil supply. Iran’s absence at the meeting was cited as a primary catalyst for the end of talks. We expect oil to trade lower, as markets unwind some of oil’s recent run-up that occurred in anticipation of more positive news. Brent crude closed Friday 14% above its 100-day moving average and more than 50% above the January lows near $26. Given the elevated correlation between credit spreads and oil prices, we would not be surprised to…
Light economic data from the United States expected this week, and the European Central Bank (ECB) is expected to deliver additional monetary stimulus. China releases February’s Merchandise Trade Balance, Consumer Price Index, and Producer Price Index while Japan and the EU both release their latest GDP prints. MACRO VIEW We are looking for signs of an upturn in the data when we update our WCA Fundamental Conditions barometer and forecasts next week. For now, we view the recent stabilization in commodities and better tone in the stock market as providing some reason for optimism, but we need further evidence that…
A short trading week sees December 2015 Consumer Price Index released on Wednesday, January’s Philadelphia Federal Reserve (Fed) Business Outlook Survey on Thursday, and December 2015 Existing Home Sales on Friday. Consumer prices have been showing more life than other inflation readings. According to Econoday, the consensus for December is for a fourth straight 0.2% gain for the core (ex-food and ex-energy) reading. Total prices are expected to come in unchanged reflecting another expected decline for energy. The Federal Reserve Bank of Atlanta recently lowered its Fourth Quarter of 2015 growth forecast from 0.8% to 0.6% (see below). This would…
A Christmas-shortened week sees the final release of third quarter Gross Domestic Product (GDP) on Tuesday and Core Capital Goods Orders on Wednesday. Markets close early on Thursday for Christmas Eve and are closed on Friday for Christmas Day. Core Capital Goods Orders could be the best leading indicator of all on business investment spending. Orders tend to decline six to twelve months before an economic downturn and typically rebound anywhere from three to eighteen months after the bottom of the recession (See chart below). The steady climb in capital goods orders that followed the last recession has slowed somewhat…
Full Report WHAT ’S DRIVING GROWTH? Asset Allocation Update Fourth Quarter, 2015 From 1980 to 2007, the economy grew near a robust 3-3.5% trend growth rate throughout the 27-year period. The period began with the Dow at 840 and ended 2007 with the Dow over 13,000. Recessions were of the normal variety, with business slumps followed by robust recoveries and expansions. Technology, an expanding workforce, a pervasive spirit of entrepreneurial risk-taking, freer trade, lesser regulation, and reduced tax burdens all fostered growth. This 27-Year Period Saw: 1. GDP grow to $15 trillion from $6.5 trillion, 2. Household net worth grow to $67 trillion from $10…
The world economy continues to grow at half-speed as emerging economies downshift from a period of rapid and credit-fueled growth. At the same time, developed economies like the United States appear to be growing at a slow-but-steady pace. Before the last recession, emerging economies grew near 9% and developed economies grew near 3%. Today, those growth rates stand nearer to 4% and 1.8%, respectively. The world’s economies are collectively growing at a little more than half as fast as they were just a few years ago. Financial market conditions are tightening, however, and this introduces some downside risk. Financial market…
This week brings more information on the economy’s performance including Friday’s August employment report. The rise in volatility comes just weeks before the Federal Reserve (Fed) is expected to decide on the timing of the first rate increase in a decade. Consequently, the focus will be on how the recent spike in market volatility is sustained and to what extent it feeds back into the real economy. While last week’s tumult is probably too recent to register much of an impact on the employment report, each new piece of information from here will be evaluated from the perspective of how…
We see higher long-run returns from emerging markets after a five year period of sideways performance and as returns in recent years push the Morgan Stanley Capital International (MSCI) EM Index well below the long-run trend (chart below). We are currently expecting long-run EM equity returns to be about 1% higher than our current long-run domestic equity return, now that the emerging markets have suffered through five years of sideways market action and underperformance versus developed equity markets. The multi-year slog for emerging market investors means that major EM indices remain near the levels seen during the 2008-2009 recession, despite…
Greece’s troubles enter a new and uncharted phase this morning, as Greek negotiators abandoned talks this weekend with creditors and, instead, called for a July 5 referendum where the Greek people will vote on whether they agree with the latest proposal by creditors (which actually no longer exists). Greece’s creditors rejected Greece’s request for an extension of the current loan program, which means that the Greek government will not have access to a remaining 16 billion Euros of additional funding. Consequently, the Greek government will most likely miss a €1.5 billion Euro payment due to the International Monetary Fund (IMF)…
The May employment report was solid and brings the three-month average job growth number to 206,000. The unemployment rate of 5.5% is within a range that could be considered within earshot of “full employment.” Wages are picking up modestly, as hourly earnings continue to show signs of lift (now above 2% year over year). Hours worked remain relatively steady. Consequently, the “output gap” continues to narrow, and all signs are pointing to a rate increase by the Federal Reserve (Fed) later this year. This action is out of step with broader global indicators of growth, and this was highlighted by…
Year Six and Counting This Friday will bring another employment situation report, and expectations are for another addition of 248,000 jobs with the unemployment rate expected to hold steady near 5.5%. To put the progress in perspective, we thought we would use this week’s News You Can Use to lay on the table a simple overview of the economic progress made to date. We are now six years beyond the deepest recession since the Great Depression, and we are beyond the recovery phase and into the expansion phase. Although we’ve seen some slippage in the data of late, the broader…
The dollar halted its relentless rise of the past few months last week as the Federal Open Market Committee (FOMC) offered a set of macro forecasts that were much weaker than the markets expected. Forecasts were cut across the board for growth and inflation for both 2015 and 2016. The longer run expectation for inflation remained at 2%, while the longer run expectation for unemployment was reduced to 5-5.2%. At the same time, the FOMC (as expected) removed their “patient” language in describing their posture with regard to the timing of an initial rate increase. The combination of the lowered…
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Thursday’s European Central Bank (ECB) announcement on monetary policy should attract considerable investor attention, given mounting deflation concern and faltering growth across much of Europe. Macro View The flow of data relating to economic and market fundamentals has become increasingly mixed as global inflation slips, demand from emerging markets weakens further, and investors express higher risk aversion. The widening of credit spreads, flattening of the yield curve, and an increase in volatility, as measured by the VIX, are all clear manifestations of heightened risk aversion. These impulses, coupled with continued signs of weakness in global growth, have led to declines…
As we head into the new year, we see the United States economy emerging as a bright spot on the global stage. For 2015, we expect to see above-trend growth, further improvement in private sector balance sheets, and generally improved confidence. The domestic economy should perform better than Europe, where structural reform is still needed, and better than many of the emerging markets, which continue to struggle. Chinese growth should continue to moderate, while Russia and other large net energy exporters will struggle given today’s lower oil price. A recent modest pickup in volatility, slippage in Treasury yields, and a…
Macro View As 2014 starts to wind down, we see oil prices headed south along with bond yields and equity prices closing near the highs for the year. This is a happy state of affairs for most, as 401(k) values are getting a boost while daily living expenses get a bit easier to carry. In contrast to the oil shocks that occurred in 1973-1974, 1979, 1980, 1990, and 2003-2004, today’s sharp drop in oil prices is conveying benefits to the average worker who has been struggling to see a real increase in wages. With the average price for a gallon…
Last week’s strong jobs report continues a trend of solid data that suggests the U.S. economy is closing out 2014 with good form. Macro View The U.S. economy continues to deliver relatively solid results. Just recently, we’ve seen impressive results on employment, purchasing managers indices, and vehicle sales. Notably, last month’s 321,000 jobs added were the most since January 2012. To put this in perspective, the total number of private sector jobs added in the past year is close to 2.66 million. This pace is better than our expectation for this year and is near the peak level of job…
Macro View Our fundamental view remains optimistic as we head into the final few weeks of the year. Overall, the growth thesis for the United States remains intact and the bout of volatility seen in October failed to produce any meaningful lasting drags or impediments to growth. With the Dow nearing 18K and the S&P 500 nearing 2100, the improvement in the outlook for the U.S. economy and earnings growth is clearly well recognized. Earnings growth for the third quarter will come in very close to 8% over last year’s results. As with the second quarter, the third quarter growth…
Macro View We are increasingly tied to goings on in the rest of the world especially as exports now account for a record 13.6% of gross domestic product. By that measure, trade’s contribution has never been more important to the U.S. economy than it is today. Last year, the United States exported $2.3 trillion in goods and services, which in turn supported 11.3 million American jobs. Over the last five years, the increase in U.S. exports accounted for approximately one-third of economic growth. Capital markets, too, have become inextricably intertwined. Global growth matters, therefore, and the news recently from many…
Macro View Fundamentals in the economy and capital markets continue to move in a positive direction and, at near 15x forward earnings, equities appear reasonably priced compared to Treasuries. Still, the changing dynamics of global growth, employment, and inflation are keeping markets attention. This week, politics will move to center stage as Americans go to the polls to cast their votes in midterm elections. Polling ahead of the midterms seems to favor Republicans given President Obama’s 40% approval rating and a historic bias against incumbents during midterm races. Republicans are looking to pick up six net seats in the Senate…
Most of the data we examine is moving in a direction consistent with continued growth. This is being reflected in the performance of markets, which seem to be anticipating further growth ahead. Portfolios are tilted toward U.S. dollar assets, especially U.S. equities. Bond allocations are focused on shorter-duration and high-quality issues. We remain cautious on gold.
The second quarter showed a “bounce” in activity from the first quarter’s “dip.” The first quarter gross domestic product registered the first quarterly decline in three years during the first quarter. Steady final demand and the fading of weather effects and inventory drag are helping to right the ship. Foreign conditions are relatively weak, but we believe these trends are likely to reverse in the months ahead.
Our barometer for measuring changes in fundamental conditions is hovering just north of 50. Recent incoming economic data are also generally supportive of continued growth.
Indications of steady final demand by domestic consumers, along with improving cyclical components like production and orders, sets the stage for a bounce in activity through the second quarter.
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