Global stocks continue to gain ground compared to bonds (chart, below). Headlines on trade, the budget, and Brexit are recent market movers. The resolution of these issues, yet unknown, could shape how the rest of the year plays out. A bullish scenario envisions growth returning to the globe as nations reach compromises. An intensification of these issues, or if left unresolved, could further darken the outlook.

Slowing growth in China, softening sales of homes and automobiles, weak retail sales, and a sharp decline in European industrial production are the latest signs of stress. The adoption of a “wait and see” approach to rate hikes by the Federal Reserve and European Central Bank are in response to weakness. Analysts have slashed earnings forecasts, too. According to FactSet, S&P 500 earnings are expected to decline 2.2% in the first quarter.

Neither is the bond market completely buying the positive story the stock market is telling. On Friday, the Treasury yield curve flattened to the lowest level since 2006, just prior to the last recession. The spread between the yield on 10-year and 3-month U.S. Treasury bonds fell to just 0.24%. This spread, which ranged between 1.5% to 2.5% from 2009 to 2016, is watched as an indicator of potential recession. A very flat or negative spread is often followed by weak growth or recession.

On the plus side, corporate bond spreads over Treasuries stopped widening in recent days. A rising yield on corporate bonds compared to Treasuries could mean investors are more concerned about corporate finances. A year ago, investors required about 1.3% higher yields than long-term Treasuries to own long-term Baa-rated corporate paper. After rising to 2.4% in early January, the premium is back to about 2.1% — a step in the right direction.

We are not going to guess how trade issues will resolve. The next few weeks should be very revealing, however, as the China trade and Brexit negotiations progress. To date, these issues are casting a cloud over the outlook for the global economy, weighing on sentiment, and dampening demand and investment.

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst

(973) 549-4168


Disclosures

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.

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.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

This commentary often expresses opinions about the direction of market, investment sector and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

Washington Crossing Advisors LLC is a wholly owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF).