Insight & Commentaries

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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France, Germany, Spain, Portugal, Sweden, the Netherlands, Switzerland, and Japan remain stuck with negative short-term (2-year) interest rates. By comparison, at 2.3%, the United States’ two-year Treasury rates seems to be quite a bargain. However, markets are expecting that U.S. rates at the short end of the curve will not be moving higher any time soon, and could even move lower despite relatively strong growth. An investor today can lock in a rate of 2.16% in the forwards market at which that investor could borrow or lend for one year’s time one year from now. This “forward” rate is below…

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The S&P 500 returned 13.7% in the first quarter, the best quarterly performance since 2009. This follows almost a 20% drop in the S&P 500 during the fourth quarter. The concerns about global growth and rising interest rates, which contributed to last fall’s market selloff, appear to be easing. The WCA Fundamental Conditions “Barometer” advanced sharply in the past few weeks as signs emerged that growth may be picking up in the United States. Accordingly, equity exposure was increased and bond portfolio duration reduced across tactical asset allocation models. Full Report Click Here

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A Turning Point?

Analysts have come to believe that S&P 500 companies failed to grow earnings during the just completed first quarter. Moreover, the forwards market for short-term interest rates sees no further U.S. rate increase on the horizon. Global bond markets are, once again, priced with negative yields in Germany, Japan, Spain, and France. The U.S. Treasury curve is flirting with inversion, where long-term rates fall below short-term rates, which can be a recessionary signal. Despite this backdrop, investors returned to equities in the first quarter of 2019. A Turning Point? Undoubtedly, the International Monetary Fund will weigh in on the state…

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As has been the case for the past year, worries over global growth continue to dog markets. Last Friday’s large miss on Germany’s purchasing managers index is more evidence that global growth has turned sour (Chart A, below). Some hoped that a better result would be seen from Germany given that order rates have held up. However, the 44.7 reading on the index is far below 50, creating cause for further concern about Europe. The miss follows earlier warnings on growth from the European Central bank, who recently issued a cut to their outlook. Bloomberg’s estimate of 2019 German growth…

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Expectation Setting

Investor expectations are usually anchored by central bank expectations which is why central bank statements deserve much attention. This Wednesday’s update on monetary policy from the Federal Open Market Committee (FOMC) is especially important given the FOMC’s recent pivot to “patience.” Market expectations are now set for an 85% probability of no further rate increases this year. The process of reducing short-term rate expectations, which began last fall, has now rippled through global financial markets, dampened volatility and helped buoy stocks so far in 2019. As the Federal Reserve gets ready to release an updated “dot plot” this Wednesday, the…

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Central Banks Fall In-Line The global economy worsened in recent months by most accounts, but policy changes are now in place that could foster some improvement. Central banks in the United States, China, and Europe recently began moving toward greater accommodation — a major shift from early last fall. The Federal Reserve is telegraphing a need for “patience”, China has unveiled tax cuts and increased bank lending, and the European Central Bank (ECB) is now signaling renewed stimulus. Slipping growth is the reason cited for most of this renewed accommodation. Good Growth, Reasonable Valuation The United States growth engine appears…

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THE WEEK AHEAD Is A Turn At Hand? If the U.S. expansion makes it to March, it will match the 1990s expansion as the longest on record. But the last few months have seen a slowing in global growth and a pickup in market volatility. Even though the current data flow remains mixed, global growth could improve because worries over trade and tightening monetary policy have faded and policy changes suggest stabilization. Our WCA Fundamental Conditions Barometer (chart, below), which measures broad changes in the growth outlook, improved slightly in the past month, but remains at levels suggesting some continued…

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Global stocks continue to gain ground compared to bonds (chart, below). Headlines on trade, the budget, and Brexit are recent market movers. The resolution of these issues, yet unknown, could shape how the rest of the year plays out. A bullish scenario envisions growth returning to the globe as nations reach compromises. An intensification of these issues, or if left unresolved, could further darken the outlook. Slowing growth in China, softening sales of homes and automobiles, weak retail sales, and a sharp decline in European industrial production are the latest signs of stress. The adoption of a “wait and see”…

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