Monday Morning Minute 021218
THE WEEK AHEAD
The drop in stocks from January 26 erased 10% from the market averages. There have been at least two dozen declines of 10% or better over the last 30-years, to put things in perspective. Very few other indicators show a spreading of concern into other areas of the markets or the economy. In the past week, corporate credit spreads remained unchanged; forecast inflation was down only slightly; and S&P 500 earnings forecasts rose. Investors can take some comfort in knowing that a broader reading of the market’s “tea leaves” continues to point toward growth.
Source: Bloomberg; WCA
If the last couple week’s market action seems surprising, it might be because there has been so little disruption recently. To measure just how quiet things had become, we measured the market’s 12-month volatility over the past 40 years (chart, below). As you can see, 2017 saw the lowest volatility of any 12-month period in over 40 years. The annualized monthly volatility for the S&P 1500 Composite index was 3% in 2017, compared to a 10% historic average. Since volatility has a tendency to average out over time, a swing to the upside in the measure shouldn’t be seen as unusual.
It is especially important at times like these to recognize that risk is part of the investing process. Without it, higher rates of return would not be possible either, because risk and return are related. Most of the time, rockiness in financial markets is short-lived and should be taken in stride. Sometimes, a haphazard disturbance can unsteady an otherwise sound environment for a longer time. There is a strong tendency for markets to right themselves so long as underlying growth trends remain intact.
Over the next few weeks we will be looking at how rising stock market volatility may be impacting other aspects of the economy. For now, we see few signs of systemic impacts from the correction. If, on the other hand, we see a persistent downturn in a wider variety of indicators, we will look to pare back risk. Falling inflation, a flattening yield curve, widening credit spreads, cuts in profit forecasts, drops in output, rising layoffs, and increased consumer pessimism all could raise concerns over a longer downturn. As of today, there is no evidence that any of these trends are yet taking hold despite the recent pickup in volatility.
ECONOMIC DATA THIS WEEK
|Monday, Feb 12:
|Tuesday, Feb 13:
|NFIB Small Business Optimism Index
|Wednesday, Feb 14:
|Consumer Price Index M/M
|Consumer Price Index Y/Y
|CPI Ex Food and Energy M/M
|CPI Ex Food and Energy Y/Y
|Retail Sales M/M
|Retail Sales Ex Autos M/M
|Retail Sales Ex Autos and Gas
|Thursday, Feb 15:
|Weekly Jobless Claims
|Philadelphia Fed Business Outlook Survey
|Producer Price Index M/M
|Producer Price Index Y/Y
|PPI Ex Food and Energy M/M
|PPI Ex Food and Energy Y/Y
|PPI Ex Food, Energy, Trade M/M
|PPI Ex Food, Energy, Trade Y/Y
|Industrial Production M/M
|Industrial Manufacturing M/M
|Capacity Utilization Rate
|NAHB Housing Market Index
|Empire State Manufacturing Survey
|Friday, Feb 16:
|Import Prices M/M
|Export Prices M/M
|Import Prices Y/Y
|Export Prices Y/Y
ASSET ALLOCATION PORTFOLIO POSTURE
Based on shorter-term expectations, the “tactical satellite” allocation within portfolios is:
Overweight Stocks vs. Bonds
Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, 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.
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The S&P 100 Index, a sub-set of the S&P 500, is a market capitalization-weighted index that measures the performance of large cap companies in the United States. The Index comprises 100 major, blue chip companies across multiple industry groups.
The S&P Composite 1500 Index, is an index of U.S. stocks that includes all companies in the S&P 500, S&P 400, and S&P 600. This index covers 90% of the market capitalization of U.S. stocks. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks.