While risk-taking remains in fashion and more stimulus is on the way, we are trimming back some equity exposure. We now forecast some tempering in the outlook ahead (Chart A, below) after a long stretch of improving conditions. As a result, we reduced stock exposure to 67% from 80% and increased bond exposure to 33% from 20%. CONQUEST tactical asset portfolios remain overweight stocks versus bonds, only less so.

Chart A

WCA Fundamental Conditions Barometer

High Hopes

Since the governments and central  banks around the world went “all-in” to save the economy from the pandemic last spring, wealth has exploded. The value of global stocks rose to $103 trillion from $70 trillion last March for a $33 trillion gain. About half the increase came from government stimulus-response last spring and summer, and the other half came as vaccinations began.

The return of risk appetite drove all markets, not just stocks. Credit spreads fell back to pre-pandemic levels (implying investors are unconcerned about defaults), the Treasury curve is the steepest it’s been in three years (implying investors see growth ahead), and long-run inflation expectations priced in to bonds are now above the Federal Reserve’s elusive 2% “goal.” Finally, expected year-ahead earnings for the S&P 500 have recovered from their swoon last spring.

“There is no stress here, and only growth ahead!” markets seem to cry valuations reach new highs.

Employment Progress Hits a Wall

While financial markets plow ahead in anticipation of returning growth, last week’s employment report gives us some reason for pause. The rapid improvement in jobs from last April to October hit a wall over the November-January period. The three-month average level of monthly job additions plunged to a miniscule 28,000. To put this in perspective, the average level of monthly job additions from 2010-2020 (before COVID-19) was 140,000. As of October, the rate was close to 1 million per month.

Keep in mind that, at current levels, employment remains very far below where pre-pandemic trends say we should be (Chart B, below). The graph clearly illustrates what it might look like if employment gains get stuck at the current growth rate. A 15 million jobs “gap” has opened up between current levels and where we should be based upon pre-pandemic trends. Without a revitalized jobs engine, chronic excess capacity could result, possibly leading to downward pressure on wages, prices, and demand. We believe this is a major motivation behind renewed efforts to advance another round of stimulus and a huge incentive to accelerate vaccinations.

Chart B

United States Employment Trends

Tail Meets Dog

Ultimately, stock valuations and interest rates are determined by economic performance. That markets are discounting near-certain continued growth is evidenced by sizable gains in most financial markets. Should questions emerge about the pace of economic improvement, such as we are seeing in the jobs data, the bull case could be challenged. There is little room for disappointment given the run-up in stock prices, tightening of credit spreads, and steepening of the yield curve. Six or nine months ago, there was plenty of room for improving expectations, but now those expectations need to be met. It seems the “dog has caught its tail” as markets have run ahead of the economy in anticipation of full recovery.

Tactical Posture

Here is a summary of WCA’s top-down tactical positioning:

  • Stocks vs. Bonds: Overweight Equities vs. Bonds
  • Global Stocks: Overweight Foreign vs. Domestic
  • Stage of Development: Overweight Developed vs. Emerging
  • Equity Style: Overweight Value vs. Growth
  • Credit Quality: Overweight Investment Grade vs. High Yield
  • Bond Duration: Overweight Short vs. Long Duration
  • Other: Overweight REITs and Neutral Gold

For our 2021 Viewpoint report, which discusses these views in greater depth, please click here.

To learn about WCA’s tactical asset allocation program, please click here.

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

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
External Sales and Marketing


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