Macro Monitor
Rolling In Cash & Spending It In Style
We take a look at how the market rewards different uses for cash and what drives management decisions about the use of cash over time. The focus here is on the three main cash applications: investment (Capex and R&D), return of cash (via buybacks and dividends), and M&A spending.
Risk Aversion Index: Stayed On “Higher Risk” Signal
The reflation trade stayed in a holding pattern with breakeven rates remaining range bound. Within fixed income, we are favorable toward TIPS and cautious on credit.
Not All Inflationary Periods Are Equal
What matters is whether an inflationary period is driven more by “demand pull” or “cost push.” Demand pull inflationary periods seem far more favorable than cost push periods, which, more often than not, occur in a “stagflation” macro context.
Risk Aversion Index: A New “Higher Risk” Signal
Our Risk Aversion Index moved higher and generated a new “Higher Risk” signal. Within fixed income, we are favorable toward TIPS and cautious on credit.
Reflation Trade—Still Has The Benefit Of The Doubt
The Fed surprised the market with a hawkish projection of two rate hikes in 2023. Real yields did not move up as they typically do with such an episode. Overall, the damage was limited to the reflation trade, and the risk-rally is intact.
Risk Aversion Index: Stayed On “Lower Risk” Signal
With the looming Fed taper and valuations stretched on almost all risky assets, volatility is likely to increase in the near term. Among fixed income, we are favorable toward TIPS and cautious on credit.
Do You Know Your Stocks’ Duration?
Most people agree that growth stocks have longer duration than value, but few bother to back this up with numbers. Our implied equity-duration study says the conventional wisdom is right: Growth stocks do have longer duration. But... the devil is in the details.
Risk Aversion Index: Stayed On A “Lower Risk” Signal
The talk of taper has started to resurface. In this context, higher inflation might become a negative for credit. For now, we remain favorable toward TIPS but turn cautious toward credit.
To Whom This May Concern
Economic numbers were red hot in April but a funny thing happened when the awesome data rolled in—bond yields actually went lower. Expectations have trended upward, and “whisper” numbers have set the bars even higher.
Risk Aversion Index: A New “Lower Risk” Signal
The reflation trade continued with higher breakeven rates and lower real yields, a favorable make-up for risky assets.
U.S. Dollar—A 2018 Redux?
The price action in the DXY Index over the last year shows an uncanny resemblance to the 2017-18 period, both in duration and magnitude. Overall, we believe the dollar could strengthen in the near term, but the longer-term bearish trend remains intact.
Risk Aversion Index: Stayed On “Higher Risk” Signal
The reflation theme continues to be supported by the powerful policy mix and a successful vaccine rollout. Within fixed income, we are favorable toward TIPS and short-term high-yield credit.
Reflation Trade Or Real-Yield Tantrum?
The market focus has started to shift from a reflation trade to a real-yield tantrum. We compare the latest real-yield tantrum with four prior episodes where rate increases were driven by higher real yields, while breakeven rates were flat to lower: 2005, 2013, 2015, and 2018.
Risk Aversion Index: A New “Higher Risk” Signal
While mechanical signals generated from extremely low RAI levels can be noisy, extended valuations on most assets suggest we err on the side of caution.
Will The Populist Game Stop?
We look at the recent short squeeze and examine how these populist movements affect the market performance in populist vs. establishment countries, and dig deeper into the regional versus sector effect.
Risk Aversion Index: Stayed On “Lower Risk” Signal
We remain favorable toward credit including investment grade and high yield corporates.
2021 Time Cycle — A Year Of Two Halves
We’ve updated our time-cycle composite for 2021 and it looks like it will be a year of “two halves,” with a low-vol bull-market extension in the first half of the year, followed by a much more volatile second half. This also appears to extend outside the U.S.
Risk Aversion Index: Stayed On “Lower Risk” Signal
We remain favorable toward credit and recommend both investment grade and high yield corporates.
Risk Aversion Index: A New “Lower Risk” Signal
With election risk largely in the rear-view mirror, volatility has come down across most asset classes, contributing to the drop in the RAI.
Popular Trades — No “No-Brainers”
We studied several “popular trades” and there are good reasons to be on board with most of them, but none can be viewed as a no-brainer.