Weekly (distribution list)

This week’s Consumer Price Index data will shed more light on underlying inflation ahead of the Federal Reserve’s (Fed’s) September 21 meeting. MACRO VIEW In 1919, the Federal Reserve Bulletin stated that inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods.  We like this definition because it recognizes inflation as essentially a “monetary phenomenon,” to borrow Milton Friedman’s words.  It also clarifies the central bank’s role as chief steward of the money supply and inflation rate.  Inflation, or lack thereof, is the key feature in the debate over the…

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Editors’ note:  We are renaming the weekly “News You Can Use: The Week Ahead” to “Monday Morning Minute.”  The goal is to provide a short (~ 1 minute) narrative for the week ahead each Monday (or, in this week’s case, Tuesday). THE WEEK AHEAD Light week for data.  Wednesday’s “Beige Book” provides some additional context for upcoming Federal Open Market Committee (FOMC) discussions on September 21. MACRO VIEW Now that growth is looking better, will the Federal Reserve (Fed) follow through with a rate hike in September?  We think the answer is no. Although the August employment report showed progress,…

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Global growth is picking up.  At Jackson Hole, Janet Yellen said the case for a rate increase is stronger, given the recent pickup in data.  It appears that earlier concerns that Brexit would hurt near-term growth were misplaced.  Weak productivity growth, a clouded earnings picture, and lackluster investment remain long-term concerns.  This week’s data will provide further insight into employment and manufacturing trends. The Federal Reserve of Atlanta’s “GDP Now” estimate of Q3 GDP is 3.6%.  Private forecasters seem to be raising their growth forecast toward 3%.  This is a big improvement from last winter’s 1% growth environment.  Steady consumer demand, coupled with…

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Barometer Update

The Federal Reserve (Fed) releases the minutes from July Federal Open Market Committee (FOMC) meeting on Wednesday. MACRO VIEW Credit spreads are tighter.  Commodity prices are firmer.  More stocks are participating to the upside.  Financial conditions within the banking system are improving.  These are some of the “high frequency” items that are on the mend this year.  As this happens, equity markets are performing better. Our own WCA Fundamental Conditions Barometer (below) is telling a similar story.  Around the time markets began to price in a less-hawkish Fed earlier in the year, conditions began to firm.  Commodities ended their freefall. …

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The Week Ahead

The data supports an economy gathering momentum into the third quarter.  This week brings some additional data on retail sales and consumer sentiment. MACRO VIEW The July employment report was strong.  Jobs rose 255,000 in the month, adding to the 292,000 increase in June.  These increases contrast sharply with the 84,000 average job gain in April and May.  The strength in jobs suggests income and spending are also picking up.  The Federal Reserve of Atlanta now estimates the economy will grow 3.8% in the third quarter.  Growth averaged just 1% in the fourth quarter of 2015 and first quarter 2016….

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Viewpoint

Friday’s July employment report is the big number this week.  This indicator is a focal point for the Federal Reserve (Fed) and has been very erratic of late.  The 6,000 job loss in May was shockingly poor, but it was followed by a better-than-expected 265,000 job gain in June.  Will the real labor market please stand up?  A Bloomberg survey reveals a street expectation of 171,000 jobs and a 4.8% inflation rate. MACRO VIEW Last week’s Gross Domestic Product (GDP) report showed an economy growing at just 1.2%.  This headline figure will be revised further, but taken at face value,…

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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…

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Barometer Improves

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…

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Strong Job Gains

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…

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The first half of the year saw a turnaround in several indicators we watch. While bonds managed to outperform stocks in the first half, signs of improvement in the domestic economy are emerging. Our read of recent trends in the data gives us a basis for optimism on near-term growth. Overseas prospects are still fading, and growth rates are still coming down. Britain’s “exit” referendum poses challenges to Europe at a time when growth is already weak, for example. Our WCA Fundamental Conditions Barometer remains below 50, but is showing signs of improvement. The “core” of portfolios were recently rebalanced…

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Markets Digest Brexit

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…

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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)….

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Weekly Comment

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…

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WCA Weekly Update

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…

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MACRO VIEW We are not in a recession, but we are seeing data that is uncharacteristically weak for an expansion. The last quarterly GDP report showed 0.7% annualized growth for the latest quarter with real GDP up just 1.8% over the year prior (below). This growth is too weak for comfort as it leaves the economy more exposed to a potential recession in the event of a unforeseen shock. Headline inflation of 0.4% is still well below the Federal Reserve’s (Fed’s) target and core personal consumption expenditure prices are up just 1.2% through December compared to a year earlier. January’s…

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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…

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China

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…

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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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2016 Viewpoint

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  

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Closing Out 2015

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…

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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…

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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…

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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…

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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…

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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…

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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…

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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…

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Countdown to Liftoff

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…

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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…

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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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We believe companies with a history of increasing dividends provide a good starting place in a search for fundamentally strong and growing companies. Importantly, steady dividend growth often follows consistent profitability and shareholder-focused management. A dividend growth perspective looks beyond today’s yield and considers other factors, such as quality, growth, risk, and value. A track record of dividend increases can be viewed as a tangible signal by a company’s management that they are both willing and able to boost a payment to shareholders. This commitment suggests quality fundamentals currently and an expectation of continued improvement into the future. Full report

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European Equities

Europe represents the largest part of the developed world’s equity markets outside the United States.  An analysis of opportunities in Europe requires a perspective on economic performance that is in some ways like our own, and in other ways very different.  On the one hand, Europe offers lower multiples and higher yield than U.S. equities, but growth has been stagnant for a long time. Much of the issue surrounding European prospects involves deep-rooted structural issues intertwined with a set of often-conflicted macroeconomic policies.  The combination of all of this has served to consistently depress growth below the growth rate of…

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Six years beyond the recession, we thought it would be helpful to pause and take stock of how far we have come.  Gross domestic product is about two trillion greater than where it stood during the recession.  Corporate earnings and dividends have ballooned.  Employment rolls are filling, and the unemployment rate is down considerably.  Lower fuel costs and accelerating personal income trends are helping to drive domestic sales increases.  This is a very good outcome compared with where we were just a few short years ago… For the complete report, please click here.

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It is easy to lose sight of the fact that two of the world’s three largest economies — namely Europe and China — are significantly out of step with our own economy.  Consider that the unemployment rate in the Eurozone is still above 11% and deflation is a reality (consumer prices are down 0.3% year-over-year).  China just reported another month of plunging imports (down 20% on a year-over-year basis for a second month in a row). Europe is readying a program of 60 billion Euros in monthly asset purchases to address stagnating growth and a falling price level.  The program…

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Last week’s Chicago Purchasing Manager’s Survey Index (PMI) indicated significant weakness in manufacturing during the month of February.  The index plunged from near 60 in January to 45.8 in February.  The 14-point fall brought the index to below 50, a level that is generally associated with recession.  Investors focus on the Chicago PMI because it is the first in a series of indicators that describe the health of the cyclical manufacturing sector.  Today, we will get a look at the much broader Institute for Supply Management’s (ISM) Manufacturing Survey Index.  Purchasing managers’ reports are interesting because they are on the…

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Let it Grow

After a six-month-long period of generally weakening global data, we are watching for signs that those trends are about to turn.  Although our fundamental conditions barometer has yet to turn, very recent indications seem to be hinting at the possibility of a pickup in growth. Macro View Having an unbiased method for tracking changes in fundamental conditions helps keep us on our toes and responsive to changes in conditions that have the ability to impact returns.  Although equity indices are near highs, a broader look at the data led us to reduce expectations through the back half of 2014 and into the first part…

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Macro View A meeting between Euro-area finance ministers, central bankers, and European Commission officials ended abruptly Monday, as a Greek government official said the Euro area’s recommendation to extend bailout conditions was unacceptable. Greece’s current aid package expires February 28, thus necessitating a new round of negotiations between Greece and its creditors. The newly-elected Greek government is seeking a new deal with easier terms. The cost of Greek debt and the cost for bondholders to insure against a Greek default has risen dramatically in recent months, suggesting real concern about the potential for some form of default. Monday’s failed negotiation…

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Payroll data suggests the U.S. is still the best alternative for global growth, but global conditions remain weak, and Europe and China continue to face significant challenges.  Meanwhile, domestic earnings continue to grow, as first quarter S&P 500 earnings per share (EPS) growth tracks toward 6% excluding energy (3% growth if energy is included).  Analysts expect 3.4% growth in S&P 500 operating earnings this year, according to the most recent survey from FactSet. Macro View Last week’s payroll number for January, along with upward revisions to prior months, was far better than expected and strengthens the bull case for the…

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Energy price declines should provide a benefit to global growth and lower inflation.  Real growth could be materially boosted by lowered energy and gas prices by as much as $100 billion in the United States alone, as the lower price acts as a positive shock to consumption.  On the flip side, we recognize that the impulse for lower prices emanated from weaker demand from emerging markets.  Should the Federal Reserve (Fed) proceed with a midyear rate hike, one less prop for commodity prices will be removed. It is hard to interpret exactly how much of this is already priced in…

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