August Preview

August 2017 begins to close the door on summer here in the United States, but it is also a relatively quiet month in terms of big market moving events. The Federal Reserve (Fed), European Central Bank (ECB), and Bank of Japan all had meetings last month and they won’t hold official monetary policy meetings again until September. Another solid earnings season is winding down as well, which means big news driven events may be slim in August. Even though the month is light on highly anticipated events, this doesn’t mean there can’t be volatility, in fact there normally is. Since the bull market started in 2009, August has been the worst month of the year twice (out of eight years) and has finished in the top half of all months for the year only twice. The biggest event of the month is probably the first solar eclipse to pass the entire continent in 99 years. Which raises the question: are the stars aligned for some volatility? Knowing this month’s history for volatility, it is important to stay on top of the significant happenings coming up. To help, we’ve created this guide to the August 2017 market calendar, providing an overview of the key events.

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Is Policy Skepticism Creating a Small Cap Opportunity?

We believe small caps are becoming an increasingly attractive tactical opportunity. The primary reason for our optimism is the amount of skepticism toward the Trump administration’s ability to move its policy agenda forward, particularly with regard to tax reform. Small cap stocks benefit disproportionately from a lower corporate tax rate because of their more domestic focus. We still think tax reform will be passed in early 2018 despite widespread skepticism, though likely a slimmer version than the Trump administration and congressional leaders have proposed. Here we discuss the opportunity in small cap stocks that may be developing as skepticism builds.

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Tax Reform Pivot?

Is it time for the tax reform pivot? Earnings season will get a lot of attention this week (July 24–28) with 190 S&P 500 Index companies slated to report, as will the Federal Reserve with its two-day policy meeting concluding on Wednesday, July 26 (though we do not expect any big news). Just as important for markets is the Republicans’ latest unsuccessful attempt to reform healthcare, which means that we are closer to the pivot toward tax reform.

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Central Bank Mania Continues

The conclusion of the Federal Reserve’s (Fed) meeting on July 26 will end a busy seven days for central bank watchers that also saw meetings for two other major central banks—the Bank of Japan (BOJ) and the European Central Bank (ECB). The Fed’s policy meeting will end with a prepared statement, but will not feature any new economic projections or a press conference. The excitement seen at the Fed’s last meeting in mid-June, which included a rate hike and additional details regarding balance sheet normalization (see blog from June 14), is unlikely to be repeated, with markets pricing in only a 3% chance of a rate hike at this meeting. However, markets will closely read the Fed’s statement for any hint of the start date for balance sheet normalization and the future path of rate hikes.

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Global Summer Earnings

Can overseas earnings continue to grow and extend the first-half rally in many international markets? That is the question investors are asking as second quarter 2017 earnings season begins. Since the financial crisis of 2008, U.S. companies and equity markets have generally outperformed their overseas peers. Greater U.S. profitability and corporate efficiency have resulted in stronger earnings growth, and domestic equity markets outperforming overseas ones. That may be starting to change, as earnings growth is improving overseas and international markets are outperforming domestic market indexes.

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Gauging Global Growth

Since 2012, real global gross domestic product (GDP) growth has been between 3.1 and 3.5% annually, according to International Monetary Fund (IMF) estimates, with 2016 seeing the slowest growth of the period. At the start of the year, broad expectations were that continued support from global central banks, the potential for increased fiscal stimulus, especially in the U.S., and stabilization in commodity prices would return growth toward the top end of that range. In this week’s Weekly Economic Commentary, we review how global growth expectations have changed over the course of 2017.

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Manufacturing Matters

U.S. manufacturing still matters when evaluating the U.S. and global economy. While manufacturing as a percent of the U.S. economy has declined steadily since the end of World War II, its impact is greater than its size. Manufacturing tends to be more cyclical than service activity, and it remains a bellwether for the overall economy. S&P 500 Index companies are heavily skewed toward manufacturing-related activity and changes in earnings growth rates tend to track manufacturing activity. U.S. manufacturing has also become increasingly focused on high-tech industries that invest heavily in research and development. Finally, manufacturing still matters for the global economy—manufacturing has shrunk as a percent of the U.S. economy for decades, but the U.S. economy has also been growing over that period, helping manufacturing expand over the last several decades [Figure 1].

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