Weekly (distribution list)
Earnings season continues. According to FactSet, analyst expectations are for another decline (approximately -5% )in second quarter earnings, but forward earnings expectations are firming up. The Fed meets this week — no rate change expected. Earnings and Valuations Focus The rally of the last several sessions is being helped by a firming of earnings forecasts. Just how much improvement in earnings is expected, and what will the market be willing to pay for those earnings? According to FactSet, analysts increased their forward 12-month S&P 500 operating earnings number to $127 in June from $124 back in February. Viewed in a…
The Republican National Convention kicks off in Cleveland this week. Expect politics to dominate headlines. Meanwhile, the basic pattern in the data still suggests an improving economy as we head toward the fall. MACRO VIEW The market’s rally of late is accompanied by improvement in the WCA Fundamental Conditions Index*. Through May, the index rose to 45 and is likely to break above 50 by the time all of the data becomes available. Earnings forecasts for the S&P 500 are up four straight months, along with some surveys of business expectations. Oil prices are no longer at lows. Expectation of…
Last week’s jobs report was solid. A total 287,000 jobs were added in June, bringing the quarterly average to 147,000 per month. The June number follows a very weak May reading, however. There is considerable volatility in the month-to-month data, so it is important not to become overly fixated on one month. Comparing the second quarter average job gain of 147,000 to last year’s second quarter job gain of 205,000 paints a weaker picture. Overall, we see an economy that is still expanding but, as a result of slower global growth, has downshifted into a slower gear. Our hypothesis, that…
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…
This week’s data includes a look at consumer prices and industrial production on Tuesday. Each is relevant given recent below trend growth in fundamental data. MACRO VIEW Headline consumer prices (CPI) in the last year were pressured by a sharp decline in the energy component of the index. Stripping out energy (and food), core underlying inflation trends appears stronger (second chart, below). The core inflation numbers tend to be the ones emphasized most by policy makers, however. The rise in current core inflation trends stand at odds with overall inflation and future expectations for falling headline inflation (bottom chart, below)….
Productivity growth averaged 3% through the 1950s and 1960s, declined to 2% from the mid-1970s through 2007, slid to just over 1% since the 2008-2009 recession, and fell to under 0.5% last year. We are at serious risk of stagnating growth, should this trend continue. In such an environment, tactical approaches will be required as long-run returns would tend to diminish with real growth rates. Currently, we see recession risk above historic averages, given generally weakening global data. This slippage in fundamentals that became more evident in late 2015 contributed to our elevated focus on quality in equity portfolios and…
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…
The Federal Open Market Committee (FOMC) convenes for the first time in 2016 on Tuesday and Wednesday amid the worst start to the year ever for the equity markets. Market uncertainty and low oil prices have tempered expectations for how quickly the Federal Reserve (Fed) will raise interest rates this year. Unlike the previous FOMC meeting in December 2015, Janet Yellen will not hold a press conference at the conclusion of this meeting. The earnings season is underway and expectations are for a 6% decline in earnings, which would mark the third consecutive quarter of earnings declines. The S&P 500…
China dominates the discussion as we begin a new year. Sharp drops in Chinese stock markets forced closure of mainland exchanges last week. Indications are increasing that China is seeking to further devalue its currency in the face of weak export demand and declines in manufacturing. We think such a move represents a step backward on the path toward rebalancing and internationalization, which ultimately leads to a healthier outcome for China and the world. Devaluation perpetuates dependency on a broken model of export-driven growth and delays a necessary shift toward a greater role of the private sector and domestic consumer…
This morning’s equity market sell-off follows a 7% decline in China’s Shanghai Stock Exchange Composite Index. The decline tripped circuit breakers and led to a closure of China’s exchanges. A weak read on China’s official Purchasing Manager’s Index (PMI) and increased tension between Saudi Arabia and Iran are contributing to the negative tone. China’s PMI remained below 50 for a fifth month and points to continued weakness in China’s manufacturing sector. Protests and an attack on Saudi Arabia’s embassy in Tehran, precipitated by Saturday’s announcement of Saudi Arabia’s execution of 47 prisoners, including a well-known Shiite cleric, adds to investor…
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