Last week we learned the United States’ economy expanded at 3.1% from a year ago through the first quarter. As the bars in the chart below shows, this marks a continuation of an accelerating growth trend that began in 2016. The improvement came despite headwinds including an escalating U.S. / China trade war, a government shutdown, Europe’s political unrest, and volatile markets at the end of last year.  The positive growth trend is not seen in business investment, however, and this is concerning to us. Last week’s GDP report, for example, revealed that nonresidential fixed investment (business investment) rose at an annualized pace of only 2.3% in the first quarter, below the growth rate in overall GDP. The 2.3% growth in business investment is also down from a 5.4% pace in the fourth quarter.

Even more recently, we saw a disappointing April capital goods orders report. This suggests business confidence may have worsened as we began the second quarter. April’s durable goods report cited a 0.9% decline in non-military capital goods orders. This follows a downward revision of a 0.3% gain for March. This puts the year-over-year growth rate for core capital goods orders up just 1.3%, well below the economy’s 3.1% year-over-year growth rate (chart, below). The trade war with China and an inventory buildup are the likely reasons for the recent weakness. The Trump Administration imposed 25% import tariffs may further soften the May numbers. Durable goods spending is an important barometer of economic health and business confidence. A high degree of forward looking business spending supports higher stock prices. We raised our equity allocation from underweight stocks to just above neutral as data improved through the quarter. We will hold our asset mix firm unless we see a sustained and broad-based deterioration in the data.

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client Portfolio Manager
Suzanne Ashley, Analyst

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www.washingtoncrossingadvisors.com
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Disclosures

WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.

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