Monday Morning Minute 022618
THE WEEK AHEAD
Busy week ahead for data as we begin to get an early read on February data.
Since early 2016, incoming data has told the story of improving global growth. Today, our WCA Fundamental Conditions Barometer (below) remains above 50 supports a bullish case. We attribute the 30% rise in U.S. stock values to improving earnings, which in turn, reflect better growth.
Further augmenting the earnings outlook, and the run-up in stock values, was last year’s tax cut. That cut will begin to filter into reported profits in the months ahead, and into withholding tables very soon. We expect worker’s income and spending, along with corporate investment, to see a lift as this happens. At the same time, government spending is also set to rise which should increase the deficit. The combination of all this comes as the economy is nearing full employment according to most economists.
While the surge in stock values from December through January can be largely explained by the tax changes, it also led a significant ramp-up in expectations for interest rates. We saw a marked increase, for example, in rate expectations through January and wrote about that on January 22. Rising rates and higher stock valuations contributed to a market correction at the end of January.
Since that break, we are seeing initial positive signs. Some of the rate jitters have abated, stocks have firmed somewhat, volatility has receded, and credit spreads are reasonably well behaved. Still, we are expecting to see some welcome moderation in the pace of equity price gains in the months ahead. We say “welcome” because for gains to be sustained, it is important that price remain rooted in fundamentals. Ultimately, a steadily improving economy over a long period with relatively low inflation is a good recipe for returns.
We update our forecast path for our barometer this month (above). Our near-term growth expectation remains solid, but some settling down seems in order. Expectations appear aligned with improving fundamentals, but valuations also reflect continued non-inflationary growth.
ECONOMIC DATA THIS WEEK
|Monday, Feb 26:||New Home Sales MoM||Jan||4%||-9.3%|
|Tuesday, Feb 27:||Advance Goods Trade Balance||Jan||-$72.3b||-$71.6b|
|Durable Goods Orders||Jan||-2.30%||2.80%|
|Durables Ex Transportation||Jan||0.50%||0.70%|
|Cap Goods Orders Nondef Ex Air||Jan||0.50%||-0.60%|
|Cap Goods Ship Nondef Ex Air||Jan||—||0.40%|
|S&P CoreLogic CS 20-City MoM SA||Dec||0.60%||0.75%|
|S&P CoreLogic CS 20-City YoY NSA||Dec||6.30%||6.41%|
|S&P CoreLogic CS US HPI YoY NSA||Dec||—||6.21%|
|Conf. Board Consumer Confidence||Feb||126||125.4|
|Wednesday, Feb 28:||GDP Annualized QoQ||4Q17||2.50%||2.60%|
|Chicago Purchasing Manager||Feb||65||65.7|
|Pending Home Sales MoM||Jan||0.40%||0.50%|
|Pending Home Sales NSA YoY||Jan||—||-1.80%|
|Thursday, Mar 1:||Personal Income||Jan||0.30%||0.40%|
|Initial Jobless Claims||2/24||226K
|Markit US Manufacturing PMI
|Construction Spending MoM
|ISM Prices Paid||Feb||70||72.7|
|ISM New Orders||Feb||—||65.4|
|Wards Domestic Vehicle Sales||Feb||13.3m||13.1m|
|Wards Total Vehicle Sales||Feb||17.2m||17.1m|
|Friday, Mar 2:||U. of Mich. Sentiment||Feb||99||99.9|
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.
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.
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