Weekly (distribution list)
Our macro outlook is for slow growth and stubbornly low inflation. The start of policy normalization following years of zero interest rate policy in the United States comes at a time of weakening global growth and mixed signals from the domestic economy. We continue to view the United States economy as best positioned to weather the overall weak global environment that resurfaced in 2015. In this report, we take a long-term view and address expectations for markets over the long run. Full Report Click Here
Markets will digest data from the real estate market, as Tuesday sees the release of the S&P Case-Shiller Report from October and Pending Home Sales from November is released on Wednesday. Markets are closed on Friday for New Year’s Day. The economy is closing 2015 with a whimper. This week we will get the Chicago Purchasing Managers index for December. Lately, this Index has been weak, reflecting a build of inventories and weak export markets. Chicago is just a regional survey but does a reasonably good job in predicting movements in the national survey which, in turn, is a reasonably…
The United States appears to be generating better growth these days when compared to estimates of its potential. The graph below shows how the United States’ output has risen by more than the potential growth estimated by the Congressional Budget Office. For seven quarters in a row, the economy has produced a higher growth rate than potential, which is absorbing excess capacity. As this happened, the unemployment rate fell to near 5% from 10% back in 2009. The total number of hours worked has expanded by 10% over that period as more jobs were added than lost. Capital investment has…
This week, data on industrial production, housing starts, and consumer prices are expected. Industrial production has recently been weak, and consumer prices are advancing below the Federal Reserve’s (Fed) 2% target. Macro View The WCA Fundamental Conditions Barometer indicates a softening of growth through the last three months. Following August’s volatility spike, the forecasted path for our barometer was ratcheted down incrementally. Currently, we see the barometer trending toward the 30-40 range in the months ahead (graph below). Not surprisingly, equity markets and most economic forecasters are adjusting to a lower expected global growth rate. The August and…
This Friday’s employment report took on some additional importance last week as the Fed reminded markets that they remained focused on incoming data for guiding their decision regarding a rate hike in December. Last week’s policy statement was interpreted as more hawkish, since it referred to monitoring data for determining a rate hike “at its next meeting.” Some interpreted the mention of the specific calendar date as an indication of greater hawkishness, after several weeks of increasing speculation that a rate hike would be pushed further out into 2016. The Fed’s posture seems to lean in the opposite direction of…
The Federal Reserve (Fed) meets on interest rates this week, and two indicators of October manufacturing activity are expected to indicate weakness through the month. Expectations for an imminent rate hike have been moving further out as global growth disappoints. The International Monetary Fund (IMF) recently cut their forecast for global growth to just 3.1% this year, compared to 3.4% growth last year. The globe is struggling with an adjustment to a lower growth trajectory following a series of credit and investment booms. The latest indications of declining growth came from the Mario Draghi and the People’s Bank of China…
Earnings Season Ahead The third quarter is over, and companies will begin reporting soon. Expectations are for a 5% decline in earnings, according to a FactSet survey. If so, the decline will be the second in a row and the first back-to-back decline since 2009. Still, we see corporate balance sheets and cash generation at very robust levels, but the composition of sources and uses of cash are shifting (more on this below). The usual suspects will be identified as sources of weakness. A strong dollar, weak commodity prices, and slower overseas growth will top the list of challenges. The…
The United States continues to make progress. Yes, manufacturing slowed during the summer, but the rest of the economy is doing well. Demand for goods and services is holding up. More Americans are becoming employed and very few are filing for unemployment insurance. For the first time in years, the percentage of the population with jobs is rising. Income and spending are rising, too. With the unemployment rate at 5.1%, the Fed is nearing its first rate increase in a decade. The Fed believes that the best way to forecast inflation is by looking at labor market slack. To measure…
THE WEEK AHEAD Markets suffered losses last week as investors weighed a variety of threats to global growth, notably China. Commodities remain under pressure and emerging markets continue to feel the pinch from global slowing. As the dust settles, we believe the United States will remain an attractive destination for global capital. We continue to focus strongly on quality and consistency in equity selection while tactical allocations have been moved closer to policy portfolio allocations. Volatility is likely to remain elevated. Update on Our Outlook The past week again reminded investors that volatility is still with us. Since 2012, stock markets…
With 38 days to go before the Fed’s September rate decision, we see some signs of risk aversion in markets and continued signs of weak growth outside our borders. Here are just a few examples. Credit spreads spiked last week, as the difference between the Moody’s Baa Corporate Bond Yield®, which acts as a credit index, and the long-term U.S. Treasury bond spiked above 230 basis points (it was 180 basis points back in April). There is a growing number of declining equity issues across the various U.S. exchanges relative to advancing issues. A good portion of this turbulence can…
The market will digest the latest twist in the ongoing Greek bailout saga this week, Janet Yellen’s semiannual testimony before Congress on the economy and monetary policy, and a series of earnings reports including several of the major banks. Our comments this week focus on how higher volatility shares reflect changed investor attitudes regarding risk in recent years. Macro View While the return of a risk-taking attitude is helpful for the economy to grow, we are mindful that there is an eventual limit to the amount of risk that markets will ultimately be willing to assume. Increasing risk tolerance can…
Fundamental conditions began to slip last fall and continued through the first quarter of this year. Stocks lagged behind bonds during most of this time, and the economy ground to a halt in the first quarter. Now, it appears that conditions are firming somewhat as we enter the summer months. If this sounds familiar, it should. Last year, we saw a similar pattern. After contracting at a 2.1% annualized pace in the first quarter of 2014, the economy roared back in the subsequent two quarters with growth nearing a 5% pace through mid-year. With worry over the Federal Reserve (Fed),…
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