Developed Countries
President Trump’s recent tweet on tariffs opened the floodgates of uncertainty on the U.S. / China trade front and caused a massive spike in volatility and risk premia (policy uncertainty shown inverted, bottom panel) as investors have been extremely complacent, something we have been flagging of late at U.S. Equity Strategy. Likely the near-three percentage point swing in U.S. net export contribution to real GDP growth over the past two quarters emboldened the President to up the ante in the trade negotiations. While cooler heads should prevail and a deal is in the best interest of both countries, this uncertainty surge suggests that, at least from a tactical perspective, some caution is warranted in the SPX.
Junk spreads for all credit tiers remain above our spread targets. At present: The Ba-rated option-adjusted spread is 214 bps, 35 bps above target. The B-rated spread is 356 bps, 79 bps above target. The Caa-rated spread is 709 bps, 145 bps above…
The corporate bond sector’s strong outperformance has resulted in spread tightening across the credit spectrum. In fact, average index spreads for the Aaa, Aa and A credit tiers are now at or below our fair value targets. Only the Baa credit tier, which…
If inflation runs persistently above or below 2 percent, then the Fed would be forced to adjust its policy stance to nudge it back towards target. If inflation’s deviation from target is only transitory, it means that it will return to target even if the…
Under the Fed’s existing framework, its “symmetric” inflation target is not supposed to be backward-looking. Symmetry simply means that the Fed targets 2% inflation every year, allowing for an equal probability of inflation ending up overshooting its mark as…
The rationale is straightforward: If the neutral rate turns out to be higher than expected and inflation starts to accelerate, central banks can always tighten monetary policy. In contrast, if the neutral rate is very low, the decision to raise rates could…
Underweight Stocks in the S&P insurance index have been mostly treading water since their collapse at the beginning of 2018, a result of reasonably solid premium growth and low catastrophe losses offsetting slowing growth in house & auto sales, the fundamental driver of insurers’ top line performance. However, we think another step down in relative performance is in the offing. House & auto sales have been in contraction for much of the past six months, which bodes ill for insurance profits that have already been struggling to keep pace with the broad market (second panel). This is largely reflected in the momentum of insurance pricing power, which has fallen into outright deflation for the first time since the post-GFC recovery (third panel). While insurers have seen a modest valuation contraction (bottom panel), the very slight discount does not offset the significant headwinds to future earnings. Bottom Line: Decelerating house & auto sales have caused insurers’ pricing power to fall off a cliff while valuations have proven, at least temporarily, more resilient; stay underweight the S&P insurance index. The ticker symbols for the stocks in this index are: BLBG: S5INSU – CB, MMC, MET, PGR, AON, PRU, AIG, AFL, TRV, ALL, WLTW, HIG, AJG, PFG, CINF, L, LNC, RE, TMK, UNM.
The Fed that has adopted an abruptly dovish stance and a recently inverted 10-year/fed funds rate yield curve indicates the market’s expectation that the next Fed move will be a cut, corroborated by elevated probabilities of a cut by December. This has driven a marked increase in client requests on positioning if rates are falling. Accordingly, we have updated our research to answer the question: what sectors perform best when the Fed eases? The results of our analysis of the seven Fed loosening cycles since 1965 are presented in the table below. The sector results are telling: defensives lead the pack in advance of a rate cut as market participants smell trouble and a defensive rotation occurs. The key source of funds in this defensive rotation in advance of a loosening cycle is S&P tech which underperforms early and continues to underperform dramatically through the initial stages of the loosening cycle. While we are not forecasting a cut and BCA’s view remains one of no recession for the coming 12 months, the production of this report may well be early. Nevertheless, its use as a sector positioning/return road map is evergreen; please see Monday’s Special Report for more details.
The Fed has argued that they see no signs of imminent overheating in the U.S. economy, and the most pertinent data support the Fed’s conclusion. Even after a decade-long expansion that is about to become the longest in U.S. history, cyclical spending as a…
At first blush, the first quarter’s real 3.2% growth would seem to attack the notion that the Fed has already reined in the economy. However, there was much less to the GDP release than meets the eye, as it was propped up by a 100-basis-point (“bps”)…