Monday Morning Minute ~ January 28, 2019
Global Trends Remain Negative
The contrast in performance between the U.S. economy and the rest of the world is a major theme these days. Since the beginning of 2018, a marked worsening of foreign conditions is obvious, and we expect our WCA Fundamental Conditions Barometer to register weakness when it is updated next week. Globally, we see energy and industrial metals trending lower. In Asia, we see financial conditions tightening as Chinese manufacturing fades. Brazilian industrial production has slid. European growth is slowing as financial conditions and the business sentiment turn down. The foreign piece of the global outlook is worse than a year ago, and stands in stark contrast with U.S. growth which is faring better.
A good example of how things are changing came last week. European Central Bank (ECB) President Mario Draghi said that Europe’s outlook deteriorated since December. He blamed the rapid deterioration on protectionism, emerging markets, and financial market volatility. Investors are now betting the Federal Reserve and ECB will delay rate hikes, which may be a silver lining. However, this rather quick policy turnaround from the world’s major central banks highlights the emerging global growth concerns we see in much of the data we review each month.
United States Remains Steady
The U.S. economy remains more-or-less steady despite the worsening global backdrop. Business activity here has been strong, employment is solid, and the consumer is steady. We see 50-year lows in weekly jobless claims, for example. Last weeks’ index of leading economic indicators from the Conference Board, while down a touch, remains near records. Capital goods orders, a proxy for business investment, and profit estimates are full.
Ultimately, financial market performance is the most forward-looking of our indicators. When investors expect risk ahead, or growth to falter, these perceptions show up in market behavior. Over the past few months, global bonds have led global stocks, our Treasury yield curve flattened, credit spreads widened, safe-haven stocks outperformed riskier ones, and stress in the financial system increased. If continued indefinitely, we would expect tightening financial conditions can eventually take a toll on the real U.S. economy. So far, however, there is little evidence that this is happening in the United States, but overseas economies are showing clear signs of stress.
Looking for a Turn
We expect these broad trends to turn around at some point in 2019, and maybe some recent improvement in markets will help. There is more work that needs to be done, especially relating to global conditions outside our borders, before we can sound the “all clear.”
Conquest portfolios remain tactically tilted toward long-term, higher-quality bonds over stocks.
Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst (973) 549-4168
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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