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Outlook Summary
Weight of the Evidence Neutral
Valuation Excesses Have Not Been
Relieved
U.S. Large-Caps Showing Leadership
Versus Small-Cap & The World
Cyclical Sectors Joining Relative
The persistent weakness that marked the first six weeks of the first quarter
Strength Leadership Group
was followed by persistent strength in the second six weeks, with the S&P
Bullish Breadth Divergences Could
500 rallying into positive territory for the year by the end of March. Over the
Signal That Sustainable Low Is In Place
past month investor sentiment has shifted from bullish to neutral as
widespread investor pessimism has waned. Offsetting the downgrade in
sentiment has been an upgrade in Breadth (which moved from bearish to neutral). This keeps the overall weight of the evidence at
neutral. Improving breadth does not preclude periods of consolidation or weakness, but it does set up the chance to see
bullish divergences on the next pullback. In other words, we are in a better position now to look for evidence that a cyclical low
is indeed in place.
Excessive valuations remain a significant headwind for stocks. We would add to this concern evidence that households remain fully
exposed to stocks and cash does not
appear to be building on the
Indicator Review
sidelines. The good news from a
valuation perspective is that the
headwind to earnings growth from
strength in the dollar is fading, and as
we move through 2016 this could
actually become a tailwind. To gain
confidence that any rebound we see
in earnings is more than just
currency-related volatility, we would
like to see better top-line growth.
For now, the neutral message from
the weight evidence argues for
continued caution and suggests we
could see a resurgence in volatility as
we move towards summer.
Bruce Bittles
Investment Strategist
wdelwiche@rwbaird.com
414-298-7802
10R.17
Economic
Fundamentals
remain
While economic growth
Bullish.
remains shy of robust, early-year
concerns about recession appear to
have been misplaced. Labor market
trends remain strong, with initial jobless
claims near their lows and labor force
participation seeing an upswing. The
ranks
of
the
unemployed
are
increasingly composed of those who
willingly left their previous job, a sign of
economic strength and opportunity.
Even within the manufacturing sector
there is evidence of improvement. While
the headline ISM number has seen a
modest bounce in recent months,
beneath the surface the rebound has
been
impressively
broad.
The
percentage of industries reporting
growth has expanded from less than
30% in late 2015 to 67% in March.
Source: Ned Davis Research
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Source: Baird. Ranking of 1 indicates best relative strength; ranking of 10 indicates worst relative
strength.
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Mix: Stocks /
(Bonds + Cash)
All Growth
100 / 0
Capital Growth
80 / 20
Growth with
Income
60 / 40
Income with
Growth
40 / 60
Conservative
Income
20 / 80
Capital
Preservation
0 / 100
Risk Tolerance
Bairds Investment Policy Committee offers a view of potential tactical allocations among equity, fixed income and cash, based upon a
consideration of U.S. Federal Reserve policy, underlying U.S. economic fundamentals, investor sentiment, valuations, seasonal trends,
and broad market trends. As conditions change, the Investment Policy Committee adjusts the weightings. The table below shows both
the normal range and current recommended allocation to stocks, bonds and cash. Please consult a Baird Financial Advisor in
determining if an adjustment to your strategic asset allocation is appropriate in your situation.
Asset Class /
Model Portfolio
Equities:
Suggested allocation
Normal range
Fixed Income:
Suggested allocation
Normal range
Cash:
Suggested allocation
Normal range
All Growth
Capital Growth
Growth with
Income
Income with
Growth
Conservative
Income
Capital
Preservation
95%
90 100%
75%
70 - 90%
55%
50 - 70%
35%
30 - 50%
15%
10 - 30%
0%
0%
0%
0 - 0%
15%
10 - 30%
35%
30 - 50%
45%
40 - 60%
50%
45 - 65%
60%
55 85%
5%
0 - 10%
10%
0 - 20%
10%
0 - 20%
20%
10 - 30%
35%
25 - 45%
40%
15 - 45%
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B. Craig Elder
Director
PWM Fixed Income Analyst
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