Macro Monitor
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.
Weight Watcher—Another Look At Sector Valuation
There are numerous ways to measure sector valuation, but we found the simplest one: sector weights. Overall, using simple sector weights, we arrive at the same conclusions about sector valuation as one would using conventional valuation metrics.
Risk Aversion Index: Stayed On “Higher Risk” Signal
We are cautious near term and recommend playing defense through duration reduction within corporate credit (including both investment grade and high yield).
Markets & Election—Any Clear Result Will Do
We believe the worst outcome would be a drawn-out, contested presidential election that ends up in the Supreme Court. We review historical market patterns under several election-result scenarios.
Risk Aversion Index: New “Higher Risk” Signal
Treasuries’ ability to provide downside protection has weakened; a better way to play defense is probably through duration reduction within corporate credit (including both investment grade and high yield).
A New Proposal To The Fed: Buy Bank Stocks!
While most economic numbers have been positive, the fly-in-the-ointment was the latest Senior Loan Officers’ Survey. Banks have tightened their lending standards across the board.
Risk Aversion Index: Stayed On “Lower Risk” Signal
The breakeven rates capture the spirit of the overall risk rally and continue to provide support. The change in the Fed’s policy goals means it will remain accommodative for even longer.
Textual Analysis Of Fed Statements—Always Artificial, Sometimes Intelligent
We geek it up a notch and use some of the popular text-processing techniques to quantify the hawkish/dovish sentiment of the latest Fed statement. Some human “coaching” is needed in every step of the process (hence the “artificial” part). But when these tools are used properly for carefully chosen tasks, they can be quite intelligent.
Risk Aversion Index: Stayed On “Lower Risk” Signal
With “reopening” taking a pause, we expect global policies to remain accommodative even longer. Among fixed income, we like corporate credit, which includes both investment grade and high yield bonds.
No Yield Curve Control? The Fed Spoke Too Soon
There has been chatter about the Fed implementing the so-called Yield Curve Control (YCC). Although the latest FOMC minutes suggest that YCC is not on the agenda for now, we believe the chance of YCC is probably much higher than the market currently anticipates.
Risk Aversion Index: Stayed On “Lower Risk” Signal
While the market seems to have priced in a quick recovery, recent economic data has materially exceeded market expectations and provided support to the rally. Within fixed income, we maintain a favorable view toward investment-grade corporate bonds and we still recommend staying within range of the Fed’s fire power.
The State Of The Stock/Bond Relationship
The latest action in rates is not what would be expected during a strong stock-market rally off a bear market low, but the constantly changing nature of the stock/bond relationship should not come as a big surprise. We propose a more refined four-state definition of the stock/bond relationship.
Risk Aversion Index: New “Lower Risk” Signal
Our Risk Aversion Index fell sharply in May and generated a new “Lower Risk” signal. Within fixed income, we are turning more constructive on credit, overall, and maintain our favorable view toward investment-grade corporate bonds.
Why Value Failed—Top-Down & Bottom-Up Views
From a top-down view, since 2003, Value’s performance has been much more closely tied to various asset markets and macro drivers. From a bottom-up perspective, we believe the change in Value’s migration behavior might be the key to its failure. We believe macro tailwinds and positive surprises are both necessary for a true Value revival.
Risk Aversion Index: Stayed On “Higher Risk” Signal
While macro data has turned from “bad” to “less bad,” a lot of hope for a quick recovery in economic activity has been priced in. We recommend staying within range of the Fed’s fire power for the time being.
A Cross-Asset Dash For Cash
March’s mad dash for cash didn’t stop with rates/credit/FX markets. Among equities, there was also a strong preference for cash liquidity. The market rewarded companies that had strong cash positions and punished those without—which explains why traditionally defensive styles actually underperformed.
Double-Digit Yield & Double-Dipping Curves
As the coronavirus materially increases the odds of a recession, some important parts of the U.S. yield curve (10Y-3M; 5Y-2Y) double-dipped into inversion. The two prior episodes occurred in late 1989 and mid-2006 and, in both cases, a recession followed within 18 months.