We downgraded global equities this summer based on lofty valuations, overly bullish sentiment, and the prospect of slowing global growth. Since then, valuations have improved, sentiment has turned more cautious, and while global growth will continue to decelerate in the first half of 2019, asset markets have largely discounted this outcome. Consistent with this turn of events, our MacroQuant equity model is now sending a more upbeat signal on equities, while flagging a more challenging outlook for bonds. As such, we recommend that clients overweight global equities during the next 12 months, underweight government bonds, and move cash allocations from overweight back down to neutral. We discussed our key views for 2019 in this week’s report and they remain in place following today’s adjustments. 

Today’s FOMC statement and press conference do not alter these conclusions. The Fed now expects to raise rates two times in 2019, down from three hikes in the September statement. The more gradual pace of rate increases reflects the tightening in financial conditions observed over the past few months as well as somewhat lower-than-expected inflation readings. Ultimately, we think the Fed will be able to raise rates at least three times next year as it becomes clear that the U.S. economy can tolerate tighter monetary policy. Higher U.S. rates, in conjunction with slowing Chinese growth, will keep the dollar well bid in the first half of next year, allowing U.S. stocks to outperform their foreign peers in dollar terms.

In past reports, we highlighted our intention to go long the MSCI All-Country World index if the ACWI ETF reached $64. This occurred today and we are now long the index as part of our structural trade recommendations.

Peter Berezin, Chief Global Strategist
Global Investment Strategy
peterb@bcaresearch.com