Insight & Commentaries
Earnings season continues. According to FactSet, analyst expectations are for another decline (approximately -5% )in second quarter earnings, but forward earnings expectations are firming up. The Fed meets this week — no rate change expected. Earnings and Valuations Focus The rally of the last several sessions is being helped by a firming of earnings forecasts. Just how much improvement in earnings is expected, and what will the market be willing to pay for those earnings? According to FactSet, analysts increased their forward 12-month S&P 500 operating earnings number to $127 in June from $124 back in February. Viewed in a…
The Republican National Convention kicks off in Cleveland this week. Expect politics to dominate headlines. Meanwhile, the basic pattern in the data still suggests an improving economy as we head toward the fall. MACRO VIEW The market’s rally of late is accompanied by improvement in the WCA Fundamental Conditions Index*. Through May, the index rose to 45 and is likely to break above 50 by the time all of the data becomes available. Earnings forecasts for the S&P 500 are up four straight months, along with some surveys of business expectations. Oil prices are no longer at lows. Expectation of…
Last week’s jobs report was solid. A total 287,000 jobs were added in June, bringing the quarterly average to 147,000 per month. The June number follows a very weak May reading, however. There is considerable volatility in the month-to-month data, so it is important not to become overly fixated on one month. Comparing the second quarter average job gain of 147,000 to last year’s second quarter job gain of 205,000 paints a weaker picture. Overall, we see an economy that is still expanding but, as a result of slower global growth, has downshifted into a slower gear. Our hypothesis, that…
Britain’s decision to leave the European Union (EU) reflects widespread dissatisfaction with EU governance. The rejection of EU governance highlights the inherently unstable nature of the organization. If individual members experienced long-run benefits, defections would not occur. Instead, the people of Europe would press for a formal merger. If individual members become dissatisfied, these countries are likely to break away. Why would a dissatisfied and democratic country like the United Kingdom look to remain? Most, including us, believed the vote would lean toward maintaining the status-quo. This exit vote marks the first tangible step backward from the decades old vision…
This week’s data includes a look at consumer prices and industrial production on Tuesday. Each is relevant given recent below trend growth in fundamental data. MACRO VIEW Headline consumer prices (CPI) in the last year were pressured by a sharp decline in the energy component of the index. Stripping out energy (and food), core underlying inflation trends appears stronger (second chart, below). The core inflation numbers tend to be the ones emphasized most by policy makers, however. The rise in current core inflation trends stand at odds with overall inflation and future expectations for falling headline inflation (bottom chart, below)….
Asset Allocation Update Second Quarter, 2016 The economy is slowing. After growing 1.4% in the fourth quarter, estimates are below 1% for first quarter. The global economy is faring little better. The International Monetary Fund cut its 2016 global growth forecast to 3.2%. In January, this estimate stood at 3.4%. Why so slow? A steady erosion in productivity, anemic labor growth, and deleveraging all play a role. These facts, especially productivity and labor, are harder to influence through policy. Fiscal and monetary policy are simply incapable of addressing these remaining challenges head-on. The trinity of productivity, labor, and investment determine growth…
Productivity growth averaged 3% through the 1950s and 1960s, declined to 2% from the mid-1970s through 2007, slid to just over 1% since the 2008-2009 recession, and fell to under 0.5% last year. We are at serious risk of stagnating growth, should this trend continue. In such an environment, tactical approaches will be required as long-run returns would tend to diminish with real growth rates. Currently, we see recession risk above historic averages, given generally weakening global data. This slippage in fundamentals that became more evident in late 2015 contributed to our elevated focus on quality in equity portfolios and…
The Doha oil talks concluded with a resounding thud over the weekend, as media sources reported an abrupt end to talks aimed at curtailing oil supply. Iran’s absence at the meeting was cited as a primary catalyst for the end of talks. We expect oil to trade lower, as markets unwind some of oil’s recent run-up that occurred in anticipation of more positive news. Brent crude closed Friday 14% above its 100-day moving average and more than 50% above the January lows near $26. Given the elevated correlation between credit spreads and oil prices, we would not be surprised to…
THE WEEK AHEAD The Federal Open Market Committee (FOMC) conducts their March meeting on Tuesday and Wednesday. Growth overseas remains sub-par, but U.S. consumer spending is stronger and monthly job gains are up 235,000 over the last six months. Signs of moderate inflation can are evident in the personal consumption expenditures price index. This index rose 1.3% year-over-year in January. MACRO VIEW All the churn in markets during the first quarter had little impact on our assessment of fundamentals. Our WCA Fundamental Conditions Barometer remains below 50 and portfolios are defensively allocated. The latest actions by the European Central Bank…
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