Weekly (distribution list)
The average American household’s net worth soared to $885,000 last year, 65% higher than a decade ago, according to data from the Federal Reserve and Census Bureau1. Much of the gain came from financial markets where both stocks and bonds surged. Conditions seem supportive for further gains, but valuations are looking full. Even though fundamentals look good, returns in the future should be lower because stock and bond yields sit at historic lows and because markets are already expecting good news. Rise of Liquidity Other than a small decline last week on coronavirus concerns, stocks have been quiet. When central…
The past few months, our WCA Fundamental Conditions Barometer (Table A) has bounced around sideways with no real direction. This sideways behavior comes after a monetary policy induced spring surge. With markets now in sync with central bank messaging, there is little new impetus to drive risk appetite. Ahead lies the prospect that a partial trade deal with China could bolster confidence, reenergize growth, and boost corporate earnings. Missing Link The missing link in the argument for a furthering of the current bull market is in the earnings story. Growth is critically important for any long-run bullish argument for stocks….
The current equity market bull run is the longest on record, but it is just one chapter in a bigger story. This week we look back at the current run in the context of 50 years of strong returns. What Drives Return? Return comes from one of three sources: current yield, growth of income, or changes in valuation. There is no other way to create a return. Take, for example, the S&P Composite index, which traded at $94 in September 1969, some fifty years ago. The index’s dividend was $3.15, implying a then-current dividend yield of 3.3% ($3.15 / $94)….
The Dow Jones Industrial Average and the S&P 500 are up 15% and 20%, respectively, for the year, driving the value of U.S. stocks to a record of $32 trillion. United States’ household’s net worth is $113 trillion, far eclipsing the past peak of $71 trillion back in 2007 at the height of the housing bubble. Better domestic growth than elsewhere around the world, flush corporate profits, and accommodating capital markets are all positives for U.S. investors. These conditions have gone a long-way to lift asset values to today’s levels. Diving Rates — Blessing or Curse? The rise in asset…
Trade and Brexit worries are cutting into the outlook for global growth. Most forecasts now call for slower growth next year, below our 3.5% base case expectation. While growth estimates are holding up reasonably well in the United States, global central banks are easing. The Federal Reserve is also easing monetary policy, which is helping to support financial conditions. A plunge in global interest rates is raising recessionary red flags and forward looking cash and bond returns are declining as investors chase yield. Equity allocations are trimmed to neutral given signs of cooling in the data. Tactical tilts favor value…
In the past couple of months, a number of headlines have caught our attention. We are reminded that corporate debt is surging, interest rates are at very low levels, and a trade war is ongoing. This week we look at specific portfolio actions that can be taken to weather the storm. Recent Headlines: “Volume of New Corporate Bond Issuance Breaks Weekly Record” — Bloomberg (September 9, 2019) “In Bond Anomaly, Negative Yields Bring Positive Returns” — Wall Street Journal (September 8, 2019) “As Trump Escalates Trade War, U.S. and China Move Further Apart With No End in Sight” — New…
The U.S. – China trade war is taking a toll on both countries. United States manufacturing contracted somewhat in August, based on a survey from the Institute of Supply Management. Meanwhile, China reported a 16% slump in exports to the United States in August from a year ago. The trade war escalated last month as Washington announced a further 15% tariff on many Chinese goods from September, and China responded with reciprocal tariffs and currency devaluation. Winners and Losers We are not fans of trade protectionism. Tariffs and currency wars distort economic processes away from market solutions. Consumers who buy…
This is a third part of a series on China and trade. Part one, click here. Part two, click here. From the early 2000s up to the financial crisis, debt levels surged in the United States. Borrowing allowed American households to consume not only from current income but from future income as well. The economy surged, but the borrowing led to problems and slower growth later on. But why did debt surge as it did? One possible explanation is that a growing trade deficit with China, and China’s rising trade surplus with the United States, was a root cause. Recall that…
The WCA Fundamental Conditions Barometer’s forecast path slipped to an average reading of 55 from 60 this month (chart, the bottom of page). CONQUEST tactical equity allocations trimmed back to a slight overweight to align with the barometer. The main story of last week was the rise in trade concerns stemming from the threat of new tariffs and reprisals. This week we spend a few extra minutes discussing our view of trade issues, its causes, and potential outcomes. The Trade Mess — How Did We Get Here? Some simple economic accounting concepts can go a long way to trace the…
We expect the Federal Reserve to cut rates this week by 0.25% — the first cut since 2007. Last week, the European Central Bank signaled a willingness to cut rates and buy assets. Both banks are responding to signs of slower global growth and weakening trade. These actions would mark a turnaround in messaging from a year ago. At that time, most were expecting global rates to move higher as growth kept on an upward path. A Fine Line The central banks must walk a fine line between voicing a worrying message about growth and providing “insurance” against a potential…
The past few months have seen a marked decline in market volatility. Corporate earnings are holding steady and bond yields have declined, allowing stock values to recover from last fall’s rout. However, concerns about trade, capital investment, and global growth remain and are opening the door for central banks to ease. Our read of a broad range of data is better than six months ago, with domestic conditions winning out over foreign. Therefore, we maintain tactical tilts toward domestic over foreign, value over growth, and developed over emerging. Near-term trends in our WCA Fundamental Conditions Barometer lead us to maintain…
Evidence continues to point to continued, moderate growth in the United States economy. Take last Friday’s June employment report, for example. Jobs grew by 224,000 in the United States during June, better than expected. Hourly wages are rising 3.1%, about 1% higher than inflation, suggesting a steady backdrop for household spending. The performance was not so strong, however, as to suggest the Federal Reserve needs to revisit rate hikes anytime soon. The overall unemployment rate remains near 3.7%, below what many economists see as “full employment”, but without actual signs of inflation, there is little anxiety over a potential outbreak…
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