Monday Morning Minute 090616
Editors’ note: We are renaming the weekly “News You Can Use: The Week Ahead” to “Monday Morning Minute.” The goal is to provide a short (~ 1 minute) narrative for the week ahead each Monday (or, in this week’s case, Tuesday).
THE WEEK AHEAD
Light week for data. Wednesday’s “Beige Book” provides some additional context for upcoming Federal Open Market Committee (FOMC) discussions on September 21.
Now that growth is looking better, will the Federal Reserve (Fed) follow through with a rate hike in September? We think the answer is no.
Although the August employment report showed progress, the economy remains slow. In the past year, the economy grew just 1.2% in real terms. This is below the 2.08% average growth rate in recent years (chart, below). At the same time, investment spending and the most recent survey of purchasing managers was weak. Moreover, other global economies are weak and are having trouble getting growth to lift. Fiscal policies are generally not expected to provide much thrust to growth, either. With the European Central Bank (ECB) and Bank of Japan leaning toward further easing, the Fed should take a pass on raising rates on September 21.
What is important here is recognizing the upturn in the data. Our analysis of incoming data began to turn up in late spring. While the chart shows a steady downtrend in growth, it seems that growth is stabilizing. With hourly wages up 2.8% this year and employment rolls steady, demand remains decent. If businesses now increase expectations for 2017 sales, investment spending plans could get a boost. Tightening labor conditions, firmer core inflation, and a falling output gap, lead us to conclude monetary policy should continue to tighten.
We increased equity allocations in recent months to recognize a fading of downside risks to growth. Longer-term returns remain lower than the past, given low-starting rates and full equity valuations.
ECONOMIC RELEASES THIS WEEK
|Monday, September 5:||Labor Day – Markets Closed|
|Tuesday, September 6:||ISM Non-Manufacturing Index||August||55.4||55.5|
|Wednesday, September 7:||JOLTS Job Openings||July||—||5,624|
|Fed Beige Book|
|Thursday, September 8:||Weekly Jobless Claims||September 3||—||263 K|
|Friday, September 9:||No Economic Releases|
ASSET ALLOCATION PORTFOLIO POSTURE
LONG-RUN STRATEGIC POSTURE: Our long-run forecasts lead us to overweight large cap domestic growth stocks, high-yield corporate bonds, and gold in the diversified “core” of portfolios. Underweight positions in “core” are long-term U.S. Treasuries, foreign developed equities, and REITs. Meanwhile the equity allocation in the short-term tactical “satellite” portion of portfolios was increased to 40% equity / 60% fixed income from 33% equity / 66% fixed income. Mid-year rebalancing took place at the end of June to reflect updated long-run forecasts.
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.
The WCA Fundamental Conditions Barometer measures the breadth of changes to a wide variety of fundamental data. The barometer measures the proportion of indicators under review that are moving up or down together. A barometer reading above 50 generally indicates a more bullish environment for the economy and equities, and a lower reading implies the opposite. Quantifying changes this way helps us incorporate new facts into our near-term outlook in an objective and unbiased way. More information on the barometer is found in our latest quarterly report, available at www.washingtoncrossingadvisors.com/insights.html.
Client-approved reports and commentaries click here
Kevin Caron, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst