It is hard to conclude almost anything with certainty amid this pandemic. Are schools open? Or closed? Or half-open and half-closed? There seems to be less unanimity in Congress on policy issues. The size of continued supplemental unemployment benefits was at issue before this weekend’s executive order. Republicans favored a $200 additional benefit, and Democrats wanted $600. President Trump’s $400 figure falls neatly in the middle of the $200-$600 range, but questions over the order and funding for the order remain. The “muddled middle” will have to suffice for now, but, by comparison, today’s situation is far better than where we stood back in March.

The Story in the Data

After the spring shutdown, the main story of May-July was “reopening.” Shortages, bottlenecks, and empty shelves are mostly gone. Some restaurants have been able to reopen with modified service. Some students will return to school in the fall, while others will attend online. All of this is directionally good for a struggling economy, but a long way from “normal.” Let’s take a look at a handful of other data points we track.

Some Observations

  1. Automobile Sales — July’s automobile sales rose to 14.5 million units, up 11% from June’s 13.3 million unit pace;
  2. Jobless Claims — Weekly jobless claims averaged 1.4 million in July, down 700,000 a week from June;
  3. Manufacturing Orders — Orders rose faster than inventories for the second straight month in a row in July;
  4. Flights — Commercial flights exceeded 70,000 for the first time last week, far better than the 25,000 average last spring;
  5. Weekly Activity — The New York Federal Reserve’s Weekly Economic Index is now about halfway back to pre-pandemic levels.

Markets also continue to behave well. For example, the S&P 500 and Dow Jones Industrial Average are back to break even for the year, and participation is broad-based. Also, the advance-decline line for the New York Stock Exchange remained above the three-month average through July, a bullish trend. Moreover, default probabilities priced into corporate bonds appear to be falling based on trends in spreads between Baa-rated corporate bond yields and U.S. Treasuries. For example, the average credit spread was 290 basis points (2.9%) in July versus a 3-month average of 320 basis points (3.2%). Lastly, trends in stocks and corporate bonds signal improvement, likely reflecting a combination of supportive policies and less investor nervousness.

Our own WCA Fundamental Conditions Barometer (graph, below) returned to a neutral reading near 50 with expectations for further improvement into the fall. A bullish case could include continued policy supports, progress toward a COVID-19 vaccine or treatment, and absence of a significant spike in COVID-19 cases and deaths. Politics will also come into focus due to upcoming elections in the fall, potentially introducing some new uncertainties. For now, we must acknowledge that, while murky and imperfect, most of the data seems to be headed in the right direction after a most challenging spring.

Chart 1

WCA Fundamental Conditions Barometer

Portfolio Posture

CONQUEST portfolios are tactically tilted toward stocks over bonds, given the forecast path for our barometer, above. A tilt toward gold exists in the core as the dollar weakens, and the Federal Reserve continues to grow its balance sheet amid mounting fiscal deficits. Portfolios are light on emerging markets as debt levels are high, and commodity prices are slow to recover. High relative valuations for growth compared to value (chart, below) leaves us with a tilt toward value in the core of CONQUEST portfolios.

Chart 2

Valuation: S&P Growth vs. Value
(Enterprise Value to Sales Ratio)


As you can see, we remain in the “muddled middle” — halfway between shutdown and recovery. For now, we are focusing on the trend “improvement” part of the equation.

Kevin R. Caron, CFA
Senior Portfolio Manager

Chad Morganlander
Senior Portfolio Manager

Matthew Battipaglia
Portfolio Manager

Steve Lerit, CFA
Senior Risk Manager

Paul Clark, CFA
Senior Portfolio Manager
Municipal Fixed Income

Rick Marrone
Senior Portfolio Manager
Municipal Fixed Income

Daniel Urbanowicz
Senior Portfolio Manager
Municipal Fixed Income

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
External Sales and Marketing

WCA Fundamental Conditions Barometer:

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.

S&P 500 — The Standard & Poor’s 500 Index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.

The S&P 500 High Beta Index measures the performance of 100 constituents in the S&P 500 that are most sensitive to changes in the market. Constituents are weighted relative to their level of market sensitivity, with each stock assigned a weight proportional to its beta.

The S&P 500 Low Volatility Index measures performance of the 100 least volatile stocks in the S&P 500. The index benchmarks low volatility or low variance strategies for the U.S. stock market. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights.


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