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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…

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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…

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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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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…

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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…

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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…

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2018 Viewpoint

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

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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,…

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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…

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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…

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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…

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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…

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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…

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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.

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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…

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