Insight & Commentaries

Viewpoint 2020

Worries over rising rates and trade faded in 2019, prompting sizable gains in both bonds and stocks. Global growth seems to be firming and the United States is exhibiting stronger growth than most other developed nations as we start 2020. Low interest rates, rising wages, and record wealth is driving growth, but above average valuations reduce return expectations. This report covers Washington Crossing Advisors’ long-run views as we head into 2020. These top-down views are central to our tactical asset allocation decisions and recommendations.

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The past few months, our WCA Fundamental Conditions Barometer (Table A) has bounced around sideways with no real direction. This sideways behavior comes after a monetary policy induced spring surge. With markets now in sync with central bank messaging, there is little new impetus to drive risk appetite. Ahead lies the prospect that a partial trade deal with China could bolster confidence, reenergize growth, and boost corporate earnings. Missing Link The missing link in the argument for a furthering of the current bull market is in the earnings story. Growth is critically important for any long-run bullish argument for stocks….

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50 Years On

The current equity market bull run is the longest on record, but it is just one chapter in a bigger story. This week we look back at the current run in the context of 50 years of strong returns. What Drives Return? Return comes from one of three sources: current yield, growth of income, or changes in valuation. There is no other way to create a return. Take, for example, the S&P Composite index, which traded at $94 in September 1969, some fifty years ago. The index’s dividend was $3.15, implying a then-current dividend yield of 3.3% ($3.15 / $94)….

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We discuss recent developments in the WCA Rising Dividend Equity portfolio.

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Trade and Brexit worries are cutting into the outlook for global growth. Most forecasts now call for slower growth next year, below our 3.5% base case expectation. While growth estimates are holding up reasonably well in the United States, global central banks are easing. The Federal Reserve is also easing monetary policy, which is helping to support financial conditions. A plunge in global interest rates is raising recessionary red flags and forward looking cash and bond returns are declining as investors chase yield. Equity allocations are trimmed to neutral given signs of cooling in the data. Tactical tilts favor value…

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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 Text

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WCA fundamental conditions barometer increases slightly in October. Tactical asset allocation sees a small increase in equity versus bonds.

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The Dow Jones Industrial Average and the S&P 500 are up 15% and 20%, respectively, for the year, driving the value of U.S. stocks to a record of $32 trillion. United States’ household’s net worth is $113 trillion, far eclipsing the past peak of $71 trillion back in 2007 at the height of the housing bubble. Better domestic growth than elsewhere around the world, flush corporate profits, and accommodating capital markets are all positives for U.S. investors. These conditions have gone a long-way to lift asset values to today’s levels. Diving Rates — Blessing or Curse? The rise in asset…

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In the past couple of months, a number of headlines have caught our attention. We are reminded that corporate debt is surging, interest rates are at very low levels, and a trade war is ongoing. This week we look at specific portfolio actions that can be taken to weather the storm. Recent Headlines: “Volume of New Corporate Bond Issuance Breaks Weekly Record” — Bloomberg (September 9, 2019) “In Bond Anomaly, Negative Yields Bring Positive Returns” — Wall Street Journal (September 8, 2019) “As Trump Escalates Trade War, U.S. and China Move Further Apart With No End in Sight” — New…

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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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