Macro Monitor
The Current State Of Value—An Update
Value’s migration behavior was the key to its failure between 2010-2020—its pattern got progressively worse, culminating in a Value trap during 2017-2020. We believe macro tailwinds and positive surprises are both needed, and, while the setup on the macro front, post-2020, has become quite favorable, in order to breathe more life into Value we need to see the upswing in earnings surprises continue.
Risk Aversion Index: A New “Higher-Risk” Signal
The first U.S. presidential debate brought the election risk front and center.
Golden Intrigues
Chinese investors have flocked to gold as traditional investments have massively disappointed. Global central banks are also buying gold amid heightened geopolitical tension. Both trends help explain why gold has defied the gravitational pull of a stronger dollar and higher real yields.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Economic numbers will likely continue to cool a bit, but more election-year policy measures will be forthcoming in the next few months, cushioning the downside for the economy.
$Yen No Mountain High Enough?
One casualty of the U.S. market’s hawkish turn is the Japanese Yen. It certainly grabbed its share of headlines, yet, when viewing the selloff in historical perspective, this year’s uptick looks entirely inconsequential. Additionally, when considering the Yen through the lens of other Asian currencies, its outsized weakness versus the dollar essentially disappears. Dollar strength is the real driver and it has pummeled Asian currencies across the board.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The repricing of Fed cuts has largely run its course, removing one big negative from the market.
First BoJ Rate Hike In 17 Years—Not So Virtuous After All
To gauge how much faith we should have in this “virtuous” cycle, we examine the macro context in terms of the business cycle, the Yen, interest rates, and inflation. Ultimately, inflation holds the key to bond yields, as the main difference between pre- and post-1990 rate hikes boils down to inflation—which is also the key determinant of how far the BoJ can go in this tightening cycle.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The U.S. economy is likely to benefit from all the election-year policy measures yet to come.
Bank Lending & Wealth Effect Support U.S. Economic Resilience
Improvement in bank lending trends should be a tailwind for economic activity, while steeper yield curves also imply a looser lending environment lies ahead. Another area supporting U.S. economic resilience is the wealth effect: The surging wealth effect is boosting consumer confidence which, in turn, leads to higher consumption.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Our Risk Aversion Index edged down again in February and stayed on the “Lower-Risk” signal generated at the end of January.
Three Key Themes To Watch—Recession, Inflation & The Dollar
The probability of a soft landing has materially increased, while stronger than expected growth is likely to put a floor on inflation, which challenges the consensus disinflation view. A refresh of our Dollar Monitor suggests a weaker dollar going forward.
Risk Aversion Index: A New “Lower-Risk” Signal
Positive economic momentum is apt to carry on for a while longer. Within fixed income, we are turning favorable toward credit, especially high quality investment-grade corporate bonds.
2023—A Year Of Round Trips
The S&P 500 index painted a picture of a runaway market in 2023, but for a lot of non-equity markets, 2023 was a year of round trips.
2024 Time Cycles—Watch Politics & Geopolitics
Given how many potential political and geopolitical hotspots there are at present, it might be a bit presumptuous to think 2024 will be a typical year. Politics and geopolitics are the most underpriced risk for 2024.
Treasuries’ Short Squeeze—More Room To Run
The massive short squeeze in Treasuries had a perfect setup and a powerful catalyst.
End Of Tightening—A Tunnel Before The Light
With the market penciling in four rate cuts in 2024, the consensus appears to have accepted the idea that the last rate hike of the series was in July. We look at various market indicators around the end of previous hiking cycles and compare the historical pattern with today’s episode.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
While recession risk remains high, financial conditions have eased considerably with the recent retracement in bond yields and the dollar. We are in a favorable seasonality window and not being too bearish makes sense at this point.
A Major Yield-Curve Steepening Cycle Has Started
The 10Y-2Y yield curve broke above the key level of -0.4% and that means a double-bottom pattern is in play. While we are confident that a major steepening cycle is here, we have to acknowledge that the nascent move could fail. A steepening move is also the market’s way of signaling easier conditions ahead.
Risk Aversion Index: A New “Higher-Risk” Signal
Our Risk Aversion Index moved higher in October and triggered a new “Higher-Risk” signal.
Equity Duration Risk—Going The Wrong Way For The Magnificent Seven
Typically, duration contracts when rates go up, all else equal. The Magnificent Seven, however, saw their duration going the wrong way: They seem to be the only cohort to see duration lengthening and are now more risky than a year ago.
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