Monday Morning Minute 031918
THE WEEK AHEAD
Federal Reserve meets this week and is widely expected to deliver another rate increase.
We are seeing a small downshift in the pace of growth, based on incoming data. While not outright deterioration, there appears to be some softening in global economic momentum. This is not yet a major concern of ours, but some mixed signals have caught our attention. Here is a partial list of some of some of the items that have shown recent weakness:
1) A three month decline in Chinese manufacturing surveys;
2) A three month decline in German Business confidence;
3) Two months of slippage in manufacturing orders relative to inventories;
4) Upward creep in credit spreads; and
5) Mixed domestic consumer spending figures.
There is nothing here that has us very concerned, and after months of upside surprises to growth, things were bound to settle down a bit. As our WCA Fundamental Conditions Barometer shows below, we expect to see some further easing in the near-term outlook for fundamental conditions and growth.
We are also monitoring changes in credit spreads and earnings forecasts. Investors priced in a lower recession and default risk and higher expectations for corporate profits in the last year. In the weeks following the tax cut, the spread on Baa corporate bonds tightened significantly versus long-term Treasury bonds. By late January, the spread was near a cycle low at 140 basis points (1.4%) over Treasuries. In the last month, the Baa spread widened to a 52-week high near 170 basis points (1.7%) as the stock market advanced and recouped most of its February decline. The signals given off by the stock and bond markets are more muddled now than several months ago. As for earnings, S&P 500 forecasted profit rose from $130 at the start of 2017 to $140 before the December tax cut. By the mid-February, the forecast surged to nearly $160. Since then, however, forecasts have flattened out and talk of tax cuts has been replaced by talk of tariffs and trade war.
While economists and policy enthusiasts seem concerned by talk of tariffs and reprisals, consumers are less worried. The University of Michigan Consumer Sentiment Survey for March recorded the highest reading since the 1997-2000 period. For all the worry over trade hitting the headlines recently, consumers say that they are as confident as ever.
We continue to believe that the economy remains on a growth track, despite some recent mixed signals. Equity exposure remains above neutral in tactical asset allocation portfolios, but we cut back equity exposure last week given the slippage in our WCA Fundamental Conditions Barometer (above).
ECONOMIC DATA THIS WEEK
|Monday, Mar 19:||No Economic Data|
|Tuesday, Mar 20:||FOMC Meeting Begins|
|Wednesday, Mar 21:||Fed Chair Press Conference|
|Existing Home Sales M/M||Feb||0.4%||-3.2%|
|Thursday, Mar 22:||Weekly Jobless Claims||3/17||225k||226k|
|PMI Composite Flash||Mar||—||55.8|
|Friday, Mar 23:||Durable Goods Orders||Feb||1.6%||-3.6%|
|Durables Ex Transportation||Feb||0.5%||-0.3%|
|Capital Goods Orders||Feb||0.8%||-0.3%|
|Capital Goods Shipments||Feb||0.6%||-0.1%|
|New Home Sales M/M||Feb||4.6%||-7.8%|
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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