Monday Morning Minute 102317
THE WEEK AHEAD
While markets are speculating about Federal Reserve appointments and handicapping tax reform, the earnings season kicks into high gear.
The earnings season kicks into high gear this week as markets remain focused on happenings in Washington. Roughly 40% of S&P 500 companies are set to report third quarter earnings this week and expectations are high. Strong economic performance, despite hurricane impacts, underlie optimistic analyst forecasts for corporate earnings. For the full year, 2017 S&P 500 operating earnings are expected to increase 9% from 2016, and high growth is reflected in above average valuations. The S&P 500 trades at 17.9 times expected earnings, compared with a 10-year average of 14.1 times according to FactSet Research.
Record stock prices and strong earnings growth are supported by a better economic performance. The third quarter GDP report, due out this Thursday, is expected to show continued above-trend growth. Economists surveyed by Bloomberg expect 2.6% growth, and the Atlanta Fed’s “GDP Now” forecast calls for 2.7% annualized growth. Our own WCA Fundamental Conditions Barometer, which broadly measures changes in market and economic conditions, appears to be firming slightly as we start the fourth quarter (chart, below).
Sustained market confidence, continued growth, and better earnings pushed our forecast path higher for our barometer. We now see the barometer remaining near 65 between now and year-end. The dark line through the blue shaded forecast horizon measures our “base case” forecast. This forecast lies at the middle of a broader range of less likely forecasted outcomes (shaded area). Importantly, the base case view is better than last month’s forecast, suggesting an improvement in the near-term view for economically sensitive assets.
ECONOMIC DATA THIS WEEK
|Monday, Oct 23:||Chicago Fed National Activity Index||Sep||-0.10||-0.31|
|Tuesday, Oct 24:||PMI Composite Flash||Oct||—||54.8|
|Wednesday, Oct 25:||Durable Goods Orders||Sep||1.2%||2.0%|
|Durable Goods Ex Transportation||Sep||0.4%||0.5%|
|Cap Goods Orders Nondef Ex Air||Sep||0.2%||1.1%|
|Cap Goods Ship Nondef Ex Air||Sep||—||1.1%|
|New Home Sales||Sep||555K||560K|
|New Home Sales M/M||Sep||-1.0%||-3.4%|
|Thursday, Oct 26:||Weekly Jobless Claims||Oct 21||235K||222K|
|Advance Goods Trade Balance||Sep||-$63.9B||-$62.9B|
|Pending Home Sales M/M||Sep||1.0%||-2.6%|
|Pending Home Sales Y/Y||Sep||—||-3.1%|
|Friday, Oct 27:||GDP Annualized Q/Q||3Q2017||2.6%||3.1%|
ASSET ALLOCATION PORTFOLIO POSTURE
Based on shorter-term expectations, the “tactical” allocation within portfolios is equally weighted between bonds and stocks.
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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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