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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 the European Central Bank (ECB), who recently indicated a willingness to pursue even more accommodative quantitative easing (QE) policies.

The October employment report takes on some greater significance than normal in this context.  To the extent that a date is highlighted on the calendar and the decision to raise or not is a function of “incoming data,” the October employment report is one of the few remaining key inputs.  According to Bloomberg, analysts expect an increase of 182,000 net new jobs and a fall in the unemployment rate to 5% from 5.1%.  As for wages, the data is expected to support the idea that hourly earnings are growing at roughly 2% on an annualized basis and hours worked are increasing roughly 1% on an annualized basis.  Taken together, this implies roughly a 3% growth rate in wages and salaries.  The overall growth in employment should be near 2% (chart below), well above the 1% “stall speed” that we’ve seen as a tipping point for prior recessions.

Payroll Growth

Beyond the payroll report, we are also supposed to get a host of purchasing manager survey data.  The October manufacturing Purchasing Managers’ Index (PMI) is likely to come in soft.  The index has been trending down from near 55 at the start of the year toward 50 currently (50 is the approximate dividing line between expansion and contraction for the index).  Some overhang of inventory, soft demand from overseas, and a strong dollar are all weighing on manufacturing this year.  At the same time, we should get some additional data showing that unit labor costs are up just over 2% this year while productivity growth is near 0%.  This has negative implications for profit growth.

We continue to look for a pickup in activity.  There is some speculation that further easing from Europe or China may provide a catalyst in the months ahead.  For now, we are maintaining a realistic view on returns.  Several years of outsized gains in equity markets have helped to catapult U.S. household’s net worth to over $85 trillion from $55 trillion at the bottom in 2009 and $68 trillion before the start of the financial crisis.  Looking forward, we see positive returns over the long haul, but lower than what we’ve experienced in recent years.

Asset Allocation Portfolio Posture

LONG-RUN STRATEGIC POSTURE:  Strategic allocations are set to reflect our long-run forecasts for key asset classes.  We expect policy rates to remain low as central banks continue to push lower-for-longer rate strategies.  Eventually, rates should rise back to more normal levels, but this is expected to happen gradually and unevenly.  Fixed income returns are expected to lag current yields as rates rise.  Equity returns will track moderate growth in global GDP with little to no further lift from margin expansion (margins are already elevated).  Equity valuations appear reasonable and in line with historic multiples, so no additional return is being attributed to margin expansion.


 

Disclosures

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher quality bonds. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

The WCA Fundamental Conditions Barometer measures the breadth of changes to a wide variety of fundamental data.  The barometer measures the proportion of indicators under review that are moving up or down together.  A barometer reading above 50 generally indicates a more bullish environment for the economy and equities, and a lower reading implies the opposite.  Quantifying changes this way helps us incorporate new facts into our near-term outlook in an objective and unbiased way.  More information on the barometer is found in our latest quarterly report, available at www.washingtoncrossingadvisors.com/insights.html.