Divergences have emerged: countries on a tightening path (e.g. US and UK) were more or less on track until June; while countries on an easing path (e.g. Germany, Japan, & Australia) went off script, as policy trumped historical patterns.
We are again impressed by the pattern’s predictive ability as most equity markets tracked their respective patterns quite well in 2014. Another banner year seems to be in store for the S&P 500. The exceptionally favorable pre-election year is the main reason, but we cannot be too complacent.
For the first half of the year, QE tapering disrupted the usual patterns for most interest rate related markets but equities are largely on track. In the second half, the common message seems to be higher volatility and lower returns.
1st half LT rate movements tracked cycle composite well, but we differ on the pattern in the second half. The “muddle through” pattern on the U.S. Composite Leading Indicator is more consistent with our view.