Weekly (distribution list)
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…
France, Germany, Spain, Portugal, Sweden, the Netherlands, Switzerland, and Japan remain stuck with negative short-term (2-year) interest rates. By comparison, at 2.3%, the United States’ two-year Treasury rates seems to be quite a bargain. However, markets are expecting that U.S. rates at the short end of the curve will not be moving higher any time soon, and could even move lower despite relatively strong growth. An investor today can lock in a rate of 2.16% in the forwards market at which that investor could borrow or lend for one year’s time one year from now. This “forward” rate is below…
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
Central Banks Fall In-Line The global economy worsened in recent months by most accounts, but policy changes are now in place that could foster some improvement. Central banks in the United States, China, and Europe recently began moving toward greater accommodation — a major shift from early last fall. The Federal Reserve is telegraphing a need for “patience”, China has unveiled tax cuts and increased bank lending, and the European Central Bank (ECB) is now signaling renewed stimulus. Slipping growth is the reason cited for most of this renewed accommodation. Good Growth, Reasonable Valuation The United States growth engine appears…
Global stocks continue to gain ground compared to bonds (chart, below). Headlines on trade, the budget, and Brexit are recent market movers. The resolution of these issues, yet unknown, could shape how the rest of the year plays out. A bullish scenario envisions growth returning to the globe as nations reach compromises. An intensification of these issues, or if left unresolved, could further darken the outlook. Slowing growth in China, softening sales of homes and automobiles, weak retail sales, and a sharp decline in European industrial production are the latest signs of stress. The adoption of a “wait and see”…
When Patience is a Virtue Patience is a virtue when it leads to good judgement. Last week, this kind of patience was on full display as Federal Reserve Chairman, Jerome Powell, delivered a dovish outlook on monetary policy. The more hawkish message of last summer and early fall is now gone, and rightly so given trends in the data since then. Specifically, a sharp spike in market volatility last fall, and clear signs of slowing global growth, has led to this moment. Ongoing Chinese trade and Brexit negotiations also compelled the change in attitude. We are happy to see the…
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.
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…
China has been a major contributor to the global growth story in recent years, and has had a big impact on developments in foreign and emerging markets. As we’ve noted in previous commentary, we have been seeing some weakening in growth outside the United States while growth here remains strong. A 30% drop in the Chinese stock market, a sharp reversal in the Chinese currency, and slowing output growth all point to accumulating foreign sector weakness. Within China, the Chinese government has increased stimulus as evidenced by a recent surge in local government bond issuance (chart, below), and the Peoples…
THE WEEK AHEAD Volatility picked up again last week as the Dow Jones Industrial Average fell by more than 3% on Wednesday alone. For the week, the Dow was down 4%, having bounced back from an intra-week drop of almost 6%. Wednesday’s drop marked the second day this year where the Dow fell by more than 3%. Sharp declines have become more common compared to past decades. Daily drops of 3% or more in the Dow occurred only twice during all of the 1960s; five times during the 1970s; fifteen times during the 1980s; and ten times during the 1990s….
The Bond Market Stirs The U.S. 10-year Treasury bond yield backed up toward 3.25% last week — levels not seen since 2011. Comments by Federal Reserve Chairman Jerome Powell point toward higher rates, perhaps higher than the market currently expects. Economic growth remains strong, labor conditions are growing tighter, and inflation expectations are becoming less clear. Markets have heretofore priced in a very shallow path for future rate increases, but that perception may now be changing given an unemployment rate near 50 year lows and market-implied long-run inflation forecasts are above 2% and moving higher. The net effect of changes…
Ten years after the financial crisis, the United States equity, real estate, and job markets are back to records. Household wealth has, therefore, surged to a record $106 trillion. Most of the trends we see in the domestic data flow remain strong, although conditions overseas paint a less compelling picture. With much of the slack in the domestic economy gone, and inflation near target, we expect the Federal Reserve to continue normalizing interest rates. Portfolios are tactically overweight value stocks, domestic and developed equities, short duration Treasuries, and real estate. Tactical underweights include growth, foreign and emerging markets, long-duration Treasuries,…
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