Monday Morning Minute 012317
THE WEEK AHEAD
With the inauguration behind us, we return our focus to incoming data. Also, please note the client approved WCA Viewpoint 2017 is now available.
The stock market’s move from last spring discounts the improved growth prospects developed over the last 6-9 months. Incoming economic data and better results from companies painted a better picture through the fall and drove much of the gain in stock prices. The momentum helped lift the United States’ equity market capitalization $3.6 trillion (16%) to over $25.5 trillion from $21.9 trillion a year ago, the 2.5% 30-year U.S. Treasury bond fell 20%, and recent stock market volatility is now very low. The bottom line is clear; markets are leading the economic reality, and now it is necessary for the economy to deliver results.
We have seen this movie before, however. A start-stop pattern of growth is a familiar one this cycle, so it makes sense to take some of the “feel good” market moves of late with a grain of salt. Therefore, our base case now sees a moderation in the pace of improvement through the first part of 2017 just as President Trump begins his first 100 days.
Delivering the Plan
Campaign trail promises now need to be acted upon and in coordination with Congress. Political realities should exert themselves within the new president’s first hundred days. The upcoming March debt ceiling, for example, will throw a spotlight on issues of fiscal “responsibility” just as plans are being put in place to grow the deficit. As Congress prepares to negotiate these and other fiscal changes, monetary conditions are already incorporating anticipated outcomes. The Federal Reserve (Fed) recently raised their long-run forecast for rates as forecast long-run inflation priced into TIPS broke through 2%. The dollar also rose 7% through the fourth quarter in anticipation of faster growth and higher rates. The anticipation of a fiscal plan seems to be accelerating the normalization of monetary policy; a potential negative should the trend accelerate from here.
The plan not only needs to be formulated, but passed, and financed. Each of these links in executing on the incoming administration’s plan carries its own unique challenge.
WCA Barometer Update
We view changing fundamental conditions through the lens of our WCA Fundamental Conditions Barometer (below). With the 50 level suggesting the dividing point between improving conditions and deterioration, we anticipate the likely path for the barometer to remain in “improvement” mode into the spring. However, our baseline forecast envisions some moderation in the pace of improvement. The chart depicts the index and its expected baseline path, along with a high and low-end near-term forecast. We think, therefore, the near-term odds of a recession are below average, in our view.
ECONOMIC RELEASES THIS WEEK
|Monday, Jan 23:||No Economic Releases|
|Tuesday, Jan 24:||PMI Manufacturing Index Flash||Jan||54.0||54.3|
|Existing Home Sales M/M||Dec||-1.3%||0.7%|
|Wednesday, Jan 25:||No Economic Releases|
|Thursday, Jan 26:||Weekly Jobless Claims||Jan 21||—||234 K|
|New Home Sales||Dec||-0.8%||5.2%|
|International Trade in Goods||Dec||-$64.5 B||-$65.3 B|
|Friday, Jan 27:||GDP Annualized Q/Q||4Q2016||2.1%||3.5%|
|Core PCE Q/Q||4Q2016||—||1.7%|
|Durable Goods Orders M/M||Dec||3.0%||-4.5%|
|Durable Goods Orders Y/Y||Dec||—||-1.9%|
|Durable Goods Ex-Transportation M/M||Dec||0.5%||0.6%|
|Durable Goods Ex-Transportation Y/Y||Dec||—||1.8%|
|Durable Goods Core Capital Goods M/M||Dec||0.5%||0.9%|
|Durable Goods Core Capital Goods Y/Y||Dec||—||-3.2%|
Kevin Caron, CFA, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst
WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.
Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.
This commentary often expresses opinions about the direction of market, investment sector and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.
Washington Crossing Advisors LLC is a wholly owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF).