Insight & Commentaries

Ten years after the financial crisis, the United States equity, real estate, and job markets are back to records. Household wealth has, therefore, surged to a record $106 trillion. Most of the trends we see in the domestic data flow remain strong, although conditions overseas paint a less compelling picture. With much of the slack in the domestic economy gone, and inflation near target, we expect the Federal Reserve to continue normalizing interest rates. Portfolios are tactically overweight value stocks, domestic and developed equities, short duration Treasuries, and real estate. Tactical underweights include growth, foreign and emerging markets, long-duration Treasuries,…

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The Bond Market Stirs The U.S. 10-year Treasury bond yield backed up toward 3.25% last week — levels not seen since 2011. Comments by Federal Reserve Chairman Jerome Powell point toward higher rates, perhaps higher than the market currently expects. Economic growth remains strong, labor conditions are growing tighter, and inflation expectations are becoming less clear. Markets have heretofore priced in a very shallow path for future rate increases, but that perception may now be changing given an unemployment rate near 50 year lows and market-implied long-run inflation forecasts are above 2% and moving higher. The net effect of changes…

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Ten Years After Looking back over the past ten years, the U.S. economy and stock market emerged as unlikely winners. A decade ago, Lehman Brothers and dozens of other financial firms were in the midst of collapse. In short order, the financial system and economy entered into a very dark period, culminating in a deep and painful recession. Equity markets fell by over 50% and 8.7 million Americans lost their jobs as the unemployment rate soared to 10%. From those depths, a recovery took hold and led to an expansion which endures today. Employment rolls are again full, as 20…

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Although domestic growth remains strong, the outlook for growth in other parts of the world has weakened. Global Growth Weakens Global growth is weaker than anticipated in May, said the Organization for Economic Cooperation and Development (OECD) last week in their latest Economic Outlook. Trade tensions, tightening financial conditions in emerging markets, and political risks could all further dampen the outlook according to the report.The OECD trimmed their 2018-2019 global economic growth outlook by -0.1% to 3.7%, with rising differences across countries. While the United States remains steady, the OECD sees weaker growth throughout most of the world. Confidence has…

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Full Steam Ahead The Federal Reserve meets September 25-26 to discuss next steps for monetary policy and interest rates. Firming inflation, strong growth, and low unemployment all point toward another increase in the federal funds rate. If the Federal Reserve does raise rates as expected, the federal funds rate will be at 2.25%, which will be above the central bank’s forecast inflation rate, but well below where rates peaked in past tightening cycles (chart, below). Real Rates are Back With short-rates equal to inflation, the “real” interest rate is no longer negative. How high the rate actually moves above the…

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THE WEEK AHEAD We take a look at market valuations, return patterns, and the health of the economy for clues about what might come next. Signs of Growth Are “Full Speed Ahead” The economy continues to show signs of strong growth. Friday’s August jobs report showed strength in new jobs and wages. Not only did job growth exceed expectation at 201,000 net new jobs, but incomes grew near a 5% annualized pace. Moreover, the quarterly data on output and productivity is encouraging, too. According to the Bureau of Labor Statistics, output rose 5% in the second quarter, with increased productivity…

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THE WEEK AHEAD The economy continues to power along, led by strengthening investment. Investment The economy is doing far better than we had expected a few years ago. Mired in sub-par growth for years, the U.S. economy is accelerating by most measures we follow. Jobs are plentiful, corporate profits are up, and wealth measures are full. The economy grew by 4.1% in the second quarter, the best pace since 2014. Business investment is also turning up after a two year lull in 2014-2015. Through July, core capital goods orders surged to nearly the highest levels on record. 8.5% year-over-year to…

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WASHINGTON CROSSING ADVISORS THE WEEK AHEAD Against a good global backdrop, Turkey reminds us that risk still exists. So Far… So Good… Our WCA Fundamental Conditions Barometer remained stable over the past month (chart A, below). This is a good sign for the economy and markets. Because performance has firmed up, we have stopped cutting equity exposure, and remain tactically tilted toward stocks in Conquest tactical ETF portfolios. Chart A If we drill deeper into the barometer, we can get a better understanding of what is going on. The barometer has about one-third weighting in market based indicators of “risk…

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THE WEEK AHEAD Against a good global backdrop, Turkey reminds us that risk still exists. THE CASE OF TURKEY Although the background for growth, particularly in the United States, appears good, we are reminded that the world is not without risk. The latest example of an economy in crisis is Turkey. After a period of heady growth, the country has fallen victim to a sliding currency, skyrocketing inflation and interest rates, and capital flight. The chart below shows the slide in the currency (orange line, right scale) superimposed on top of a declining stock of currency reserves (blue bars, left…

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THE WEEK AHEAD Strong economy drives earnings growth, risk appetite, valuations. A VERY GOOD QUARTER According to FactSet, second quarter results for the S&P 500 companies were strong, and technology companies led the parade. At the end of July about half of the S&P 500 companies had finished reporting financial results for the second quarter. On average, earnings per share were up 21%, thanks to tax reform and a good economy. So good, in fact, was the economy that sales rose 9.3% for the average S&P 500 company from a year before. These results are made all the more extraordinary…

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THE WEEK AHEAD Last Friday’s strong 4.1% second quarter GDP print figures to be on the minds of Federal Open Market Committee (FOMC) members as they meet this week. CONTRIBUTIONS TO GROWTH The 4.1% GDP growth rate in the second quarter is the fifth highest growth rate of the expansion (see graph below). Breaking down the significant Contributions to GDP Growth: Consumer Spending rose a very strong 4.0% during the quarter and contributed 2.7% of the total rate. Spending on services contributed 1.5% while spending on goods (durables plus nondurables) contributed 0.6%. While the jury is still out on the…

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THE WEEK AHEAD A move in the right direction? WCA PORTFOLIO INSIGHT After five months of slippage, the WCA Fundamental Conditions Barometer (chart, below) increased last month. The barometer takes into account market measures of risk appetite, indicators of U.S. economic health, and several inputs on conditions overseas. Trends in risk appetite are generally positive, but less robust than a six or nine months ago. By and large, most trends concerning the domestic economy, such as capital goods orders, employment, and earnings trends, are also quite good. We can’t call one month’s improvement a trend, but the interruption of the…

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