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THE WEEK AHEAD

The Federal Reserve’s Federal Open Market Committee (FOMC) meets this week amid further signs of improvement in the economy. No rate increase is expected, but the focus is on the central banks’ response to shrinking economic slack and fiscal policy initiatives. Pressure is also mounting for the Fed to address the management of their $4.5 trillion balance sheet.

MACRO VIEW

Core durable goods orders posted strong 0.8% growth in December and inventories were flat, suggesting better growth ahead.

The advance report on capital goods provides some useful clues about the future. Orders for factory goods tell us something about future production, output, profits, and employment. Costly durable and capital goods orders provide a good barometer for business investment. The more comprehensive factory orders report typically dovetails with the durable goods report. We focus on “core” orders, which strip out volatile aircraft and military components.

As the graph below shows, there has been a sharp pickup in orders since mid-summer. The improvement implications here for investment, profitability, productivity, and employment are all positive. A year ago, capital goods orders were down 5% year-over-year and today are up nearly 3%. These purchases include everything from machine tools to blast furnaces to robots. Thus, we can say that businesses are growing more confident about future growth.

Profits link into this picture too. As business investment picks up, the spending tends to return to business in the form of profits. A year ago, forecasted 12-month profits for the S&P 500 were near $123 per share. Twelve months later forecasted S&P 500 operating profits are up 9% to $133 per share. The improvement in global conditions fed into confidence, investment, and profits. Consequently, the tone in financial markets is also much improved.

Last week’s durable goods report provides additional evidence that economic growth remains positive and suggests a lower probability of recession over our near-term forecast horizon. Secondary implications are positives for near-term employment, profit, and productivity forecasts.

Portfolio Posture:

We remain tactically overweight equities versus bonds; credit over long-term Treasuries; domestic over foreign; and developed over emerging markets. Our WCA Fundamental Conditions Barometer is currently forecast to remain above 50 over the next 1-2 months.

ECONOMIC RELEASES THIS WEEK

 

Date Report Period Survey Prior
Monday, Jan 30: Personal Income Dec 0.4% 0.0%
Personal Spending Dec 0.5% 0.2%
Pending Home Sales M/M Dec 1.3% -2.5%
Pending Home Sales NSA Y/Y Dec 1.4%
Tuesday, Jan 31: FOMC Meeting Begins
Employment Cost Index 4Q16 0.6% 0.6%
Chicago PMI Jan 55.0 54.6
Consumer Confidence Jan 112.7 113.7
S&P Corelogic Case-Shiller HPI M/M SA Nov 0.6% 0.63%
S&P CoreLogic Case-Shiller HPI Y/Y NSA Nov 5.0% 5.1%
S&P CoreLogic Case-Shiller HPI Y/Y NSA Nov 5.6%
Wednesday, Feb 1: FOMC Meeting Ends
Domestic Vehicle Sales Jan 14.1 M 14.2 M
Total Vehicle Sales Jan 17.9 M 18.3 M
ADP Employment Report Jan 170 K 153 K
PMI Manufacturing Index Jan 55.1
ISM Manufacturing Index Jan 55.0 54.7
Construction Spending M/M Dec 0.3% 0.9%
Thursday, Feb 2: Weekly Jobless Claims Jan 28 259 K
Nonfarm Productivity 4Q16 0.8% 3.1%
Unit Labor Costs 4Q16 2.5% 0.7%
Friday, Feb 3: Change in Nonfarm Payrolls Jan 163 K 156 K
Unemployment Rate Jan 4.7% 4.7%
Labor Force Participation Rate Jan 62.7%
Underemployment Rate Jan 9.2%
Factory Orders Dec 1.5% -2.4%
Factory Orders Ex Transportation Dec 0.1%
ISM Non-Manufacturing Index Jan 57.0 57.2
Source: Bloomberg

 

ASSET ALLOCATION PORTFOLIO POSTURE

Based on shorter-term expectations, the “tactical” allocation within portfolios is underweight bonds / overweight stocks.

 

Kevin Caron, CFA, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst

(973) 549-4052

 

 

 


Disclosures

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.

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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.

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