Insight & Commentaries

The past few months have seen a marked decline in market volatility. Corporate earnings are holding steady and bond yields have declined, allowing stock values to recover from last fall’s rout. However, concerns about trade, capital investment, and global growth remain and are opening the door for central banks to ease. Our read of a broad range of data is better than six months ago, with domestic conditions winning out over foreign. Therefore, we maintain tactical tilts toward domestic over foreign, value over growth, and developed over emerging. Near-term trends in our WCA Fundamental Conditions Barometer lead us to maintain…

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The U.S. – China trade war is taking a toll on both countries. United States manufacturing contracted somewhat in August, based on a survey from the Institute of Supply Management. Meanwhile, China reported a 16% slump in exports to the United States in August from a year ago. The trade war escalated last month as Washington announced a further 15% tariff on many Chinese goods from September, and China responded with reciprocal tariffs and currency devaluation. Winners and Losers We are not fans of trade protectionism. Tariffs and currency wars distort economic processes away from market solutions.  Consumers who buy…

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This is a third part of a series on China and trade. Part one, click here. Part two, click here.  From the early 2000s up to the financial crisis, debt levels surged in the United States. Borrowing allowed American households to consume not only from current income but from future income as well. The economy surged, but the borrowing led to problems and slower growth later on. But why did debt surge as it did? One possible explanation is that a growing trade deficit with China, and China’s rising trade surplus with the United States, was a root cause. Recall that…

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This is a second part of a series on China and trade. To read part one, click here.  CONQUEST update: Last week we raised gold to overweight and high yield to underweight in the core portion of portfolios on rising geopolitical and trade concerns. We’ve pointed out that China owes much of its growth to investment (not trade). As discussed last week, much investment is being subsidized by Chinese households. These subsidies have allowed China to grow well over 7% for many years. From the early 1980s, when China had very low levels of investment, to today, as investment rates…

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The WCA Fundamental Conditions Barometer’s forecast path slipped to an average reading of 55 from 60 this month (chart, the bottom of page). CONQUEST tactical equity allocations trimmed back to a slight overweight to align with the barometer. The main story of last week was the rise in trade concerns stemming from the threat of new tariffs and reprisals. This week we spend a few extra minutes discussing our view of trade issues, its causes, and potential outcomes. The Trade Mess — How Did We Get Here? Some simple economic accounting concepts can go a long way to trace the…

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We expect the Federal Reserve to cut rates this week by 0.25% — the first cut since 2007. Last week, the European Central Bank signaled a willingness to cut rates and buy assets. Both banks are responding to signs of slower global growth and weakening trade. These actions would mark a turnaround in messaging from a year ago. At that time, most were expecting global rates to move higher as growth kept on an upward path. A Fine Line The central banks must walk a fine line between voicing a worrying message about growth and providing “insurance” against a potential…

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Steady As She Goes

Evidence continues to point to continued, moderate growth in the United States economy. Take last Friday’s June employment report, for example. Jobs grew by 224,000 in the United States during June, better than expected. Hourly wages are rising 3.1%, about 1% higher than inflation, suggesting a steady backdrop for household spending. The performance was not so strong, however, as to suggest the Federal Reserve needs to revisit rate hikes anytime soon. The overall unemployment rate remains near 3.7%, below what many economists see as “full employment”, but without actual signs of inflation, there is little anxiety over a potential outbreak…

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Weekend Détente

The U.S. and China backed away from escalating a trade war on Saturday at the G-20 meeting, a plus for near-term market sentiment. President Trump said the United States would hold off on new tariffs on $300 billion of Chinese goods. He also said U.S. technology companies could start selling equipment again to Huawei, China’s largest telecom company. Stalled trade talks are expected to restart. No Deal, but a Sigh of Relief The ceasefire did not produce a deal, but should remove immediate concerns. Currency markets responded positively to the announcement, for example, in the hours following the announcement and…

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Normally, bond investors require higher returns to own longer dated bonds. This explains why ninety five percent of the time, 10-year Treasury bond rates are higher than 3-month T-Bill rates based on monthly observations  back to 1982. The other five percent of the time, bond investors have bid up long-term Treasury bonds to such an extent that the yield on those bonds fall below short-term bills. This situation is commonly known as an “inverted yield curve” and has a strong track-record as a predictor of recessions. The chart below shows that inverted curves existed before each of the last three…

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Mixed Messages

A read of incoming data puts our WCA Fundamental Conditions Barometer near 50 with an upward trend. While the current overall reading is about average, a closer look within the component parts of the barometer reveal some interesting takeaways. Notably, market based measures of risk appetite have moved in the right direction while indicators of actual economic performance have softened. Stocks and bonds have rallied together this year. The S&P 500 and the Barclays Aggregate Bond Index are up roughly 15% and 5% respectively. For now, investors are looking past signs of slowing growth, and focusing instead on the benefits…

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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…

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A Year of Churn In the past year, forecast earnings for S&P 500 companies are up just about 9%, slightly above the S&P 500’s 5% year-on-year advance. The S&P 500 earnings yield, or inverse of the price-earnings-ratio, now stands near 6.25%, up from 5.9% a year ago. By comparison, the S&P 500 earnings yield is 385 basis points (or 3.85%) higher than the 2.4% yield on the 10-year U.S. Treasury bond. A year ago, the S&P 500 earnings yield spread over Treasuries was about 290 basis points (2.9%), so today’s 385 basis point spread points to somewhat better valuations for…

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