Insight & Commentaries
THE WEEK AHEAD We forecast that the accelerating growth phase of the past year will flatten out in the months ahead. A ramp-up in growth and investor risk appetite over the past year, courtesy of the dual “reflation” and “Trump” trades, helped lift earnings and share prices to records and volatility fell sharply. Our most recent read of the data suggests the acceleration phase may be over, and the forecast path of our WCA Fundamental Conditions Barometer (below) is expected to return to 50. At 50, we expect near-term recession risk to be near historically average levels. Where we go…
We enter the second half of 2017 with data coming in well, asset prices near records, and market sentiment good. Our analysis of current fundamental conditions points to continued growth, but the “reflation” and “Trump” trades may be losing some momentum. Portfolios are tactically tilted toward U.S. equities, with an emphasis on growth. Fixed income continues to focus on corporate bonds over Treasuries given our outlook. Full Text Here
The “reflation trade” that drove financial market behavior since the middle of last year lifted stocks and weighed on bond prices. This leaves us with an economy performing better and stock indices near records. Lower bond yields and higher equity valuations help lift short-term growth but also dampen our long-run return forecasts. In the months ahead, we expect to see the pace of improvement moderate compared to what we experienced over the past nine months. Equity allocations in portfolios were increased last summer, and we continue to maintain a modest tactical tilt toward large capitalization domestic stocks over bonds and…
THE WEEK AHEAD Markets digest last week’s failed vote on the American Health Care Act and begin to look forward to the upcoming earnings season. MACRO VIEW Congress abandoned a much awaited vote on The American Health Care Act on Friday. Uncertainty over the passage of the bill pressured equities, buoyed bonds, and weighed on the dollar last week. Markets recognize that prospects for potent tax cuts later this year was at least partly dependent on passage of the health care bill. Without funds resulting from the bill’s passage, the House of Representatives may struggle to pass a revenue neutral…
THE WEEK AHEAD We update our WCA Fundamental Conditions Index this week and forecast a period of moderation ahead. MACRO VIEW The Federal Reserve (Fed) delivered their third rate increase since 2015 last week. The increase in the federal funds target rate and rate paid on excess bank reserves was widely expected, however. Months of improving employment and inflation readings paved the way for the hike. Fed Chair Janet Yellen downplayed concerns over rising asset prices, full employment, and the size of the Fed’s balance sheet. Markets took the tone of the announcement as mostly dovish, or at least consistent…
THE WEEK AHEAD The FOMC meets this week and is expected to deliver a rate increase. Wednesday’s announcement will be associated with a summary of economic projections and a press conference by the Chair. MACRO VIEW The return on cash hasn’t been much to write home about recently. As the economy picks up, expectations for short-term interest rates are perking up (graph below). A year ago, markets were pricing in an expectation for a 1.2% short-term interest rate by early 2019. Today, that same expectation is near 1.9%. As assumed cash returns rise, they compete against returns available on other…
THE WEEK AHEAD The improving growth theme gets tested again this week with data on factory orders and employment. MACRO VIEW We are expecting to see a strong start to 2017, followed by a period of moderation through the year. We expect consumption to grow at a 5% annualized rate through the first quarter with investment growing at a 10% pace. If correct, the rolling four quarter average growth rate for the overall economy will be trending near 2.5% growth (chart below). This forecast incorporates our expectation for a March interest rate hike and recent readings from our WCA Fundamental…
THE WEEK AHEAD We expect good reports this way on durable goods and manufacturing this week, consistent with other recent data points. The improvement in the business outlook is being clearly embedded in market expectations. MACRO VIEW It has been more than 90 months since the last recession. Expected tax cuts, infrastructure spending, and regulation are fueling consumer and business optimism. In turn, this optimism is helping lift the stock market to records. Given this, we want to spend a minute to remind ourselves how we got here. During the ’07-09 recession, the U.S. stock market had an average value…
THE WEEK AHEAD Quiet week on the data front this week, but the Federal Reserve (Fed) releases minutes from their latest meeting. MACRO VIEW Last week, the February Philadelphia Business Outlook Survey (BOS) reached 43.3, a level not seen since 1973. The three month moving average rose to 24.9 which was last achieved in 2004 shortly after Congress signed the Jobs and Growth Tax Relief Reconciliation Act of 2003. Both is 1973 and 2004, the economy posted the best growth of the respective decades. Why is the report important? For one, it focuses on a very important component of the…
THE WEEK AHEAD President Trump addressed Chinese and Japanese currencies last week and reiterated his call for a “level playing field” for currencies. This week we revisit China and emerging markets where we remain underweight in the diversified core of asset allocation portfolios. MACRO VIEW Emerging markets (EM) are delivering less growth than they used to, but remain risky. Chart 1 below shows how EM growth is converging with developed markets in recent years. Potential growth is dampened by slipping productivity (green) and capital investment (red). These factors explain most of the moderation in EM growth in recent years….
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