Up, Down, Sideways, Repeat
The past few months, our WCA Fundamental Conditions Barometer (Table A) has bounced around sideways with no real direction. This sideways behavior comes after a monetary policy induced spring surge. With markets now in sync with central bank messaging, there is little new impetus to drive risk appetite. Ahead lies the prospect that a partial trade deal with China could bolster confidence, reenergize growth, and boost corporate earnings.
The missing link in the argument for a furthering of the current bull market is in the earnings story. Growth is critically important for any long-run bullish argument for stocks. With 40% of S&P 500 earnings coming from outside the United States, global growth is just as important as domestic growth. According to estimates from a Bloomberg survey, 2019 global growth (chart C , below right) is now down to about 3% from 3.7% in mid-2018. Here in the United States, the Federal Reserve Bank of Atlanta’s GDP Now survey for the current quarter is just below 2% versus 3% in the six quarters prior to mid-2018. Around about the same time that growth concerns crept in, the upward climb of earnings forecasts also hit a wall (chart B, below left). Since mid-2018, there has been no material increase in S&P 500 earnings per share (EPS) estimates by analysts. Clearly, the impact of trade worries, slowing global and domestic growth have held back corporate earnings prospects.
Conclusion and Portfolio Posture
In order for the bull case to strengthen from here, it is important that the growth outlook brightens. Multiple expansion and central bank liquidity can only carry the water so far, at some point we need to see a pickup in growth. For now, the jury seems to be out whether or not this will materialize. The latest monthly forecast of our WCA Fundamental Conditions Barometer underscores more of the up, down, sideways, repeat pattern we’ve seen since the start of summer.
In keeping with our discipline, we’ve adjusted downward the equity exposure in the CONQUEST tactical portfolios to 45% from 55% equity exposure in the short-term, satellite portion of portfolios. This level of equity exposure aligns the stock-bond mix to the near-term barometer forecast.
Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client 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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