BCA Indicators/Model

Highlights The yield curve has inverted: The 10-year Treasury bond yield fell below the 3-month T-bill rate following the March FOMC meeting and has remained there since. We never say it’s different this time, but there is not yet sufficient evidence to change course: The yield curve is almost always early as a standalone signal, and the depressed term premium may make it less sensitive right now. Monetary policy still looks decidedly accommodative to us, … : Our estimate of the equilibrium fed funds rate says policy’s easy, and that it’ll stay that way until the Fed gets serious about hiking rates again. … so asset allocation should continue to favor risk assets: There are global forces restraining Treasury yields, but the fed funds rate cycle is only partway through a stretch that has been uniformly unfavorable for Treasuries. Feature Last week’s data were soft, as the U.S. economy continues to show signs of decelerating. The consumer confidence survey disappointed hopes for an extended bounce back from January’s shutdown-shadowed release, housing starts were uninspiring, and the Case-Shiller index revealed that home-price gains continue to sag. Beyond the U.S., the message from manufacturing PMIs is glum, although the services sector seems to be holding up just fine. Our traveling colleagues report that investors around the world have developed a decided aversion to European assets. We remind our clients that deceleration is nothing new. It’s been the story so far this year, as the incremental decline in fiscal thrust ensured it would be. The inversion of the yield curve is new, however, and it’s commanding attention from the financial media and from investors drawn to a leading indicator that consistently works. We like the yield curve, too, and it’s one of the three components of our recession indicator, but it’s only one. The other two components have yet to confirm its message, and the way things look now, it may well be awhile before they do. The Yield Curve Has Inverted, The Yield Curve Has Inverted The 3-month-to-10-year segment of the yield curve inverted after the March FOMC meeting, and it dipped a little further into negative territory last week as the 10-year Treasury yield continued to melt. An inverted curve is one of the three components of our simple recession indicator,1 and we believe it can send an important signal about the economy’s vigor and the state of monetary policy. By itself, however, an inverted curve is not a sufficient precondition for a recession. It has also been something less than a timely guide to asset allocation, inverting a year ahead of a recession, on average, and six months before the S&P 500 peaks (Table 1). The yield curve has been a reliable recession warning signal, but it tends to be too early to serve as a practical guide to money management and asset allocation. Table 1Inverted Yield Curves, 1968 - 2018 Keep Calm And Carry On Keep Calm And Carry On   An inverted yield curve has called eight of the seven recessions that have occurred over the last 50 years, making it a dependable leading indicator (Chart 1). Year-over-year contraction in the Conference Board’s Leading Economic Index (LEI) has compiled the same enviable track record, calling all seven of the last half-century’s recessions with just one false positive (Chart 2). LEI tends to be timelier, however, sounding the alarm an average of five months after the curve inverts (Table 2). For our recession indicator, we also add a comparison of the fed funds rate to our estimate of the equilibrium fed funds rate, because recessions have only occurred when the fed funds rate has exceeded our estimate of the equilibrium rate (Chart 3). Chart 1The Yield Curve Has Been Reliable, Albeit Early The Yield Curve Has Been Reliable, Albeit Early The Yield Curve Has Been Reliable, Albeit Early Chart 2LEI Has Been Timelier LEI Has Been Timelier LEI Has Been Timelier Table 2LEI Contractions, 1968 - 2018 Keep Calm And Carry On Keep Calm And Carry On   The cycle is extended, and the inverted curve has made us even more alert for trouble in the economy and financial markets, but we do not think trouble is imminent. The LEI is clearly decelerating, but it has yet to contract. We currently peg the equilibrium fed funds rate at about 3⅛%, and project that it will rise to 3⅜% by the end of the year. We can’t know the equilibrium rate with exact precision in real time, but our estimate has been a reliable guide to financial market performance, and the fact that the fed funds rate is four 25-basis-point hikes from crossing the line gives us some comfort that neither a recession nor a bear market is waiting just around the corner. Chart 3Recessions Only Occur When Policy Is Tight Recessions Only Occur When Policy Is Tight Recessions Only Occur When Policy Is Tight Bottom Line: We are not dismissing the inverted yield curve, but our other recession-indicator inputs are not confirming its warning. Given the Fed’s new guidance, we expect that the next recession will not arrive before mid-to-late 2020. It’s A Little Bit Anomalous This Time At its best, an inverted yield curve is a signal from the bond market that the Fed has tightened monetary policy too much, heralding future rate cuts and a sharp slowdown. Anything affecting yields at the long end, however, has the potential to skew the curve’s signal. If long yields were somehow inflated, the curve would be less prone to invert and the signal would be delayed. If long yields were restrained, the curve would be prone to invert sooner and the signal might come especially early. Rate hikes invert the curve once the bond market decides they’re unnecessary, or expects that they’re going to be reversed soon. We believe that the yield curve currently has a bias to invert even earlier than it otherwise would. The question of how much the Fed’s asset purchases have affected the term premium,2 if at all, is far from settled within either the Fed or BCA, and is beyond the scope of this report. Nonetheless, we do think that QE1, QE2, and QE3 must have made some contribution to the decline in the term premium on long-term bonds (Chart 4). The bottom line is that we think the curve was disposed to invert earlier this time around. Its signal is still worth incorporating into our analysis, but we will seek confirmation from our other recession indicators before revamping our asset-allocation recommendations in line with an approaching inflection point in the business cycle. Chart 4The Curve Inverts More Easily When The Term Premium Is Negative The Curve Inverts More Easily When The Term Premium Is Negative The Curve Inverts More Easily When The Term Premium Is Negative The Fed And The Yield Curve We subscribe to the idea that the Fed induces recessions by removing monetary accommodation in an attempt to keep the economy from overheating. It’s simply too difficult to achieve a soft landing with policy tools that influence activity indirectly and with long and variable lags, given that the dual-mandate metrics are themselves lagging indicators. Compared to the path by which the Fed influences the economy, the path by which it inverts the curve is simple and straightforward. It raises short rates, and the long end rises as well, as the bond market discounts higher inflation and/or stronger growth, until investors no longer believe that inflation or growth prospects merit tighter policy, and long rates fall behind short rates. We reviewed moves in 10-year yields and 3-month rates across the different phases of the fed funds rate cycle (Chart 5) to see how the process has unfolded empirically. As the mechanics of yield curve inversion imply – short rates rise, long rates rise less or fall – the curve bear flattens when the Fed hikes the fed funds rate, and bull steepens when it cuts it (Table 3). The outcome fits the intuition: if the Fed’s attempt to slow the economy with higher short rates is successful, real interest rates will decline, inflation pressure will ease and bond yields should fail to keep pace with bill rates, especially if investors associate tightening campaigns with recessions. Conversely, if the Fed successfully boosts the economy with lower short rates, bond yields should fall less than short rates as the real component of rates rises, and the curve should steepen. Chart 5 Table 3The Yield Curve And The Fed Funds Rate Cycle Keep Calm And Carry On Keep Calm And Carry On Depicting our stylized fed funds rate as a bell curve makes for an appealing picture, but it obscures the fact that the Fed often pauses for a while after hiking rates to their cyclical peak, or cutting them to their cyclical trough. Phase II doesn’t end until the beginning of the next rate-cutting campaign, and Phase IV doesn’t end until the beginning of the next series of rate hikes. A stricter representation of the fed funds rate cycle would have two phases of active hiking, followed by a state of limbo between the last hike and the first cut, then two phases of active cutting, followed by a lull during which the Fed waits for signs that it should remove accommodation. The expanded fed funds rate cycle is therefore composed of active hiking in Phase I and Phase II(a), pre-easing in Phase II(b), active easing in Phase III and Phase IV(a), and pre-hiking in Phase IV(b). Table 4 shows the average monthly changes in the yield curve and its components in the expanded fed funds rate cycle. There is quite a difference between Phase II(a), when the curve aggressively bear flattens, and Phase II(b), when the curve modestly bull flattens. Phase IV(a) features a sharp bull steepening, while the long end drifts higher in Phase IV(b) and short rates barely budge. Ultimately, the real action happens when the Fed is actively adjusting monetary policy, and the duration positioning implications are quite sensitive to the transitions into and out of the active phases. Table 4The Yield Curve And The Expanded Fed Funds Rate Cycle Keep Calm And Carry On Keep Calm And Carry On Bonds And The Fed Funds Rate Cycle An inverted yield curve has provided a reliable early-warning signal about recessions, but it can be too early to drive asset-allocation decisions for a manager judged on relative returns. The curve moves in Tables 3 and 4 offer more timely implications for duration positioning within fixed-income portfolios across the fed funds rate cycle. It comes as no surprise that Treasuries perform better when the Fed is cutting rates (Phases III and IV) than they do when the Fed is hiking them (Phases I and II). Their returns should be inversely correlated with the direction of rates, and longer-maturity instruments should exhibit greater sensitivity to changes in the fed funds rate (Table 5). Table 5Treasuries And The Fed Funds Rate Cycle Keep Calm And Carry On Keep Calm And Carry On Overweight duration within bond portfolios from when the Fed stops hiking rates until it stops cutting them; underweight duration when it’s actively hiking. Expanding the fed funds rate cycle to account for active hiking, active easing, and the pre-hiking/pre-cutting limbo periods makes the duration-positioning road map clearer. Treasuries lose ground in real terms when the Fed is actively hiking, with longer-maturity instruments bearing the brunt (Table 6). They deliver in a big way when the Fed is actively easing (Phase III and Phase IV(a)), with the Barclays Bloomberg Long Treasury Index posting double-digit annualized total returns. Longer Treasuries shoot out the lights once the Fed stops hiking (Phase II (b)), and they generate real total returns that compare favorably with bull-market equities when aggregating Phase II(b)’s pre-easing results with active-easing Phases III and IV(a). Table 6Treasuries And The Expanded Fed Funds Rate Cycle Keep Calm And Carry On Keep Calm And Carry On Our terminal and equilibrium fed funds rate estimates are admittedly far from the consensus. Markets are skeptical of the FOMC’s one-more-hike projection, much less our three, four, or more terminal-rate call. With “secular stagnation” searches ascendant on Google Trends (as of Friday morning, the partially complete March 24-30 period already had the most searches of any week over the last twelve months), our equilibrium estimate is also surely out of step with the herd. If the Fed is not done, however, history says it’s not yet time to overweight duration. If we’re right, Treasuries still have the full Phase II(a) ahead of them, and won’t be a buy until the Fed desists, sometime in 2020 or beyond. Investment Implications We have taken note of the inverted yield curve, but we will not overreact to it. While it has been a reliable recession indicator for the last half-century, it consistently sounds the alarm too early to merit immediate investment action. Neither the LEI nor our equilibrium fed funds rate model has yet corroborated its warning, and the bombed-out term premium may have biased it to inverting even sooner than it otherwise would. There’s no need for Paul Revere to ready his horse just yet. We did not anticipate that the 10-year Treasury yield would decline as much as it has. The extent of the Fed’s dovishness caught us off guard, and the 10-year Treasury is having a very hard time escaping the gravity of the decline in major-economy sovereign yields around the world. Our Global Fixed Income Strategy service (GFIS) points out that the global yield decline has become extended (Chart 6), and it contends that global bond prices incorporate too much pessimism about global economic momentum. The GFIS team also notes that there’s no guarantee stock prices will fall to align with bond yields – over the last couple years, stocks and bonds have recoupled following yield scares via bond, not equity, sell-offs (Chart 7). Chart 6Enough Is Enough Enough Is Enough Enough Is Enough Chart 7Equities Have Been Smarter Than Bonds The Last Few Years Equities Have Been Smarter Than Bonds The Last Few Years Equities Have Been Smarter Than Bonds The Last Few Years We therefore remain constructive on the economy and financial markets, and advise that balanced portfolios should still maintain exposure to riskier assets. Much of that view depends on Chinese authorities relaxing their deleveraging campaign, global trade tensions easing, and some hint of green shoots appearing in the rest of the world. If those elements of our base-case scenario fail to materialize, we will likely become more cautious. We are not happy that the vindication of our high-conviction view on the terminal fed funds rate has been indefinitely delayed, but the silver lining of the Fed’s dovish surprise is that the bull market in equities and other risk assets has been granted an open-ended extension.   Doug Peta, CFA Chief U.S. Investment Strategist dougp@bcaresearch.com   Footnotes 1 Please see the U.S. Investment Strategy Special Report, “How Much Longer Can The Bull Market Last?,” published August 13, 2018. Available at usis.bcaresearch.com. 2 Long-term bond yields can be decomposed into the expected path of short-term rates and a term premium, which compensates an investor for the uncertainties that can arise over the extended time period that s/he is locking up his/her money by buying a longer-maturity instrument.

Highlights We are asked nearly everywhere we go about the Fed’s independence, … : The Fed’s independence is an especially popular topic overseas, and it typically takes some persuasion to bring clients around to our view that it’s not at risk. … and Jay Powell shed some light on how the Fed intends to protect it: Since Bernanke, the Fed has fought back against criticism by attempting to open a window on its operations, and showing how they benefit all Americans. Powell’s Stanford speech and 60 Minutes appearance continued the transparency and charm offensive. The housing debate remains unresolved, but year-to-date activity has supported our sanguine outlook: Demand came back smartly following the decline in mortgage rates, and there is still no sign of overheating or oversupply on the horizon. Coincident indicators have a place, too: We do not include the three-month moving average of the unemployment rate in our recession indicator because it’s only a coincident indicator, but it does help to validate the leading indicators we follow. Feature BCA was established on our founder’s insight that tracking money flows through the banking system informs the future direction of the economy and financial markets. Monetary policy is of the utmost importance to BCA as a firm, and the fed funds rate cycle is a pillar of our U.S. Investment Strategy asset-allocation framework. That said, spending time parsing Fed speeches can be unavailing and tedious. Although we continually monitor comments from the Fed governors and regional bank presidents, we don’t often write about them. Since last summer, when the President first began expressing his displeasure with the Fed 140 characters at a time, we have been inundated with questions about the Fed’s independence, especially from overseas clients. We have noted repeatedly that conflicts between the White House and the Fed are nothing new. They are largely inevitable, and highlight the importance of insulating central banks from political pressure. A recent television interview and speech by Fed Chair Powell illustrated how the Fed hopes to safeguard its independence. The speech also sketched out some of the arguments supporting a potential re-interpretation of the Fed’s price stability mandate. If the Fed really were to pursue some sort of price-level targeting, the implications could be profound. TRIGGER ALERT: The following sections may promote cardiac distress among Austrian School devotees and other hard-money types. An Open, Friendly Fed Fed Chair Jerome Powell sat for an extended interview with venerable U.S. television news magazine 60 Minutes, broadcast in prime time Sunday March 10th. His comments carried no new information for Fed watchers, but appearances on 60 Minutes are not intended for Fed watchers, any more than Janet Yellen’s stop to watch community college students welding on her first official trip as Chair was. Powell appeared briefly alongside Yellen and Ben Bernanke in the 60 Minutes segment, and his appearance followed his predecessors’ public-relations game plan closely: defend the Fed’s independence, and explain the Fed’s role in managing the economy, so as to dispel some of the mystery about its mission and modus operandi. It was Bernanke who first sat for 60 Minutes, in 2009 and 2010, attempting to broadcast the Fed’s aims to the general public. Yellen extended the public outreach, as we noted in these pages five years ago, following her debut appearance:1 Not only did she make her first major outside appearance at a community development conference, she placed the plight of three locals grappling with unemployment and/or underemployment at the center of her remarks. She dined at a community-college training restaurant on the night before the speech, and went to another community college after delivering it, where she visited a shop floor and watched students weld. One could easily have mistaken her for a candidate for public office, given the photo ops and her dogged efforts to drive home the message that the labor market heads the Fed’s list of concerns. A New Take On Price Stability Powell’s 60 Minutes interviewer occasionally went out of his way to express skepticism about the Fed and its pre-crisis performance. A voiceover pointed to Powell’s academic record and Wall Street experience as signs of privilege, rather than evidence of aptitude or acumen. As Powell noted in a speech at Stanford University two days before the 60 Minutes interview aired, the current climate is one of “intense scrutiny and declining trust in public institutions” globally. Outwardly welcoming the scrutiny, and seeking to shore up the public’s trust, the Fed plans to hold a series of town-hall-style “Fed Listens” events around the country. The post-crisis Fed has tried to protect its independence by becoming more transparent. The Fed’s listening tour will be a part of its year-long review of monetary policy strategy, tools and communication practices, but we were most interested in Powell’s comments on strategy as it relates to the Fed’s price-stability mandate. Concerned that the secular decline in rates will regularly make the zero lower bound a binding policy constraint, the Fed is exploring the potential for some sort of price-level-targeting strategy. As a part of its review, it is asking, “Can the Federal Reserve best meet its statutory objectives with its existing monetary policy strategy, or should it consider strategies that aim to reverse past misses of the inflation objective?” When targeting the inflation rate, the Fed hasn’t much sweated inflation undershoots. Price-level targeting would represent a significant change from managing to the 2% annual inflation target on a non-cumulative basis. As shown in Chart 1, the Fed has executed its price-stability mandate by aiming for 2% annual inflation, as measured by the headline PCE price index. In theory, each year-over-year change is an independent event, considered without regard to prior overshoots or undershoots. The post-crisis shortfalls have no explicit bearing on the price-stability goal going forward, though perhaps they have made the Fed a little more inclined to wait until it sees the whites of inflation’s eyes before it removes accommodation in earnest. Chart 1Traditional Policy Has Been Directed At Keeping Prices From Rising Too Fast ... Traditional Policy Has Been Directed At Keeping Prices From Rising Too Fast ... Traditional Policy Has Been Directed At Keeping Prices From Rising Too Fast ... A price-level-targeting framework, on the other hand, would take its cues directly from past overshoots and undershoots. Whereas the Fed simply aimed at 2% every year in the old regime, under price-level targeting, it would be attempting to stay in continual contact with the 2% trend-growth line in Chart 2. Had price-level targeting been in place since the crisis began, the cumulative misses from 2008 on would eventually have to be made up. If the price-level target were to be reached by the end of this year, 2019 inflation would have to be 8.1%; by the end of next year, annualized inflation would have to be 5%; in five years, 3.2%; and in ten years, 2.6% (Table 1). Chart 2... Price-Level Targeting Seeks To Ensure They've Risen Enough ... Price-Level Targeting Seeks To Ensure They've Risen Enough ... Price-Level Targeting Seeks To Ensure They've Risen Enough Table 1Price-Level Targeting Kinder, Gentler Central Banking Kinder, Gentler Central Banking Higher inflation rates would presumably push Treasury bond volatility higher (Chart 3, top panel), along with the term premium (Chart 3, bottom panel). The increased uncertainty inherent in hitting a moving target would also help stoke interest-rate volatility, which would ripple out into the rest of financial markets. The Fed wouldn’t deliberately pursue a policy that stokes volatility unless it delivers other significant benefits. By boosting inflation expectations, price-level targeting could help stave off a deflationary mindset like the one that has crippled Japan since the bursting of its bubble three decades ago. More immediately, it could help combat the secular stagnation effects Larry Summers has been warning about for the last several years by making it easier for the Fed to reduce real rates. Chart 3Lower Inflation Has Helped Tamp Down Treasury Volatility And The Term Premium Lower Inflation Has Helped Tamp Down Treasury Volatility And The Term Premium Lower Inflation Has Helped Tamp Down Treasury Volatility And The Term Premium There is no sign that a change in the Fed’s monetary policy strategy, as it relates to price stability, is coming. The Fed performs a great deal of research and develops hypothetical game plans for a wide range of hypothetical economic outcomes. Discussions about price-level targeting are only conceptual for now, and the Fed will not necessarily adopt it. If price-level targeting were to become mainstream policy, it might better equip central banks with a tool for counteracting disinflationary impulses and could turn out to be marginally equity-friendly and bond-unfriendly. If it were to shift to a price-level-targeting framework, the Fed would be equally concerned about undershoots and overshoots. Housing Update We were unperturbed by the softness in the U.S. housing market when we published our housing Special Reports late last year. Three months into 2019, the data have supported our view, and we remain confident that the housing market does not represent the leading edge of an imminent downturn. We expect price-level targeting would increase financial-market volatility, at least when it’s first implemented. We highlighted in those Special Reports2 that the share of residential investment as a percentage of GDP has been steadily decreasing over the past 70 years, and is down to just 3% today. Although housing remains an important component of the U.S. economy and large fluctuations in the space will surely impact other segments of the economy, it is unlikely to exert a powerful drag. Home values also comprise a sizable portion of households’ net worth, and a decline in house prices will affect consumption patterns, but investors probably exaggerate the impacts. Housing now accounts for less than 15% of household equity – well below its 1980s and 2006 peaks – whereas pension entitlements and direct and indirect equity holdings account for 25% each. The rate at which mortgage rates change can exert a powerful impact on home sales and residential construction activity. 2018’s soft housing data was likely the byproduct of the yearlong rise in mortgage rates. Home sales and construction tend to decline in the six-month period after mortgage rates rise (Chart 4). Although higher mortgage rates took a toll on housing affordability last year, it remained at comfortable levels relative to history, and has already regained a good bit of ground now that the 30-year mortgage rate has declined by half a percentage point since its November peak. Mortgage applications have duly picked up since the end of last year. Chart 4Mortgage Rates Hurt Housing Last Year, But Are Poised To Help It This Year Mortgage Rates Hurt Housing Last Year, But Are Poised To Help It This Year Mortgage Rates Hurt Housing Last Year, But Are Poised To Help It This Year Most importantly for the overall economy, there is no evidence of construction excess. In contrast to the decade preceding the crisis, there is still plenty of room for new supply as housing starts still lag the pace of new household formations. New-home inventories have increased, but only back to their pre-housing boom range, and they amount to no more than a fraction of existing-home inventories, which are bumping around 30-year lows (Chart 5). The aggregate supply of homes for sale is not at all a matter for concern. Chart 5Housing Inventory Levels Are Low Housing Inventory Levels Are Low Housing Inventory Levels Are Low Bottom Line: The outlook for the housing market has improved since the end of the year. Homes remain affordable relative to history, and the aggregate inventory of homes for sale is the lowest it’s been since the mid-‘90s. The housing market still looks okay to us. Unemployment Is A Coincident Indicator We received a question from a client following last week’s review of our bond-upgrade and equity-downgrade checklists. Why do we include the three-month moving average of the unemployment rate in the equity checklist, but not our recession indicator? The simple answer is that the recession indicator is meant to be forward-looking.3 The unemployment measure has a sterling track record of coinciding with recessions, but it does not lead them (Chart 6). Chart 6A Coincident Indicator A Coincident Indicator A Coincident Indicator The three components of our recession indicator – an inverted yield curve, year-over-year contraction in the Leading Economic Indicator (LEI), and an above-equilibrium fed funds rate – have all consistently preceded recessions (Table 2). When combined into a single indicator, they’ve done so an average of just over six months before the onset of recessions, in line with the S&P 500’s average peak. The unemployment rate has been a coincident indicator, sending its signal an average of just under a month after recessions begin (Table 3). Table 2Lead Times For Indicator Components And Bear Markets Kinder, Gentler Central Banking Kinder, Gentler Central Banking Table 3Unemployment And Postwar Recessions Kinder, Gentler Central Banking Kinder, Gentler Central Banking The unemployment rate’s three-month moving average has a perfect record of coinciding with recessions, but indicators have to lead to be included in our recession alarm system. Tacking on an extra month to account for the lag in the data release, the unemployment rate alerts an investor to a recession two months after it’s begun. That’s too late to help sidestep the brunt of the S&P 500’s bear-market declines, so we leave it out of our recession indicator. Unemployment’s recession signal is nonetheless a good bit more timely than the NBER’s official recession declaration, which has come an average of eight months after the start of the last five recessions. The three-month moving average of the unemployment rate provides reliable confirmation that recessions have begun, and that has earned it a place in our equity checklist. Doug Peta, CFA   Chief U.S. Investment Strategist dougp@bcaresearch.com Jennifer Lacombe, Senior Analyst jenniferl@bcaresearch.com Footnotes 1      Please see the April 7, 2014 U.S. Investment Strategy Weekly Report, “Fed To America: We Care.” Available at usis.bcaresearch.com. 2      Please see the November 19, 2018 and December 3, 2018 U.S. Investment Strategy Special Reports, “Housing: Past, Present And (Near) Future,” and “Housing Seminar.” Available at usis.bcaresearch.com. 3      Please see the August 13, 2018 U.S. Investment Strategy Special Report, “How Much Longer Can the Bull Market Last?” Available at usis.bcaresearch.com.

Highlights Dovish Central Banks & Duration: Bond markets have shifted rapidly in recent weeks, pricing out any and all rate hikes expected over the next year in the major developed economies. With global growth likely to rebound in the latter half of the year, bond yields are now exposed to a hawkish repricing and recovery in inflation expectations, especially in the U.S. Stay below benchmark on overall portfolio duration on a medium-term basis. Model Bond Country Allocations: We are sticking with our current country tilts in our model bond portfolio, as the recent shift in central banker biases has done little to change the relative fundamental drivers between countries. Stay underweight the U.S., Canada & Italy, and overweight core Europe, Japan, the U.K., Spain & Australia, in currency-hedged global government bond portfolios. Feature Well, That Escalated Quickly With global growth remaining soggy, an increasing number of major central banks have been forced to rapidly shift in a more dovish direction. This past week alone, the European Central Bank (ECB), the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) all signaled that interest rates would be on hold for some time. The ECB went the extra step of announcing a new bank funding program (TLTRO-3), as we predicted last week, to prevent a deeper euro area growth downturn at a time of, as ECB President Mario Draghi described it, “pervasive uncertainty”. Government bond yields declined sharply in all three regions, as markets digested the dovish message from more cautious policymakers. Our Central Bank Monitors for the major developed economies are all decelerating, in line with the soft patch of global growth. Yet only the RBA Monitor has fallen to a level clearly signaling a need for easier monetary policy in Australia. For the other major countries, the Monitors are indicating that an unchanged monetary policy stance is appropriate, and all for the same reason – the loss of economic momentum has not been enough to loosen tight labor markets and drive core inflation rates lower. Government bond yields have already responded to a loss of global growth momentum by pricing out any rate hikes that were expected over the next year, most notably in the U.S. and Canada. Inflation expectations have also adjusted downwards in response to both diminished growth expectations and last year’s sharp plunge in global energy prices. We expect global growth to rebound in the latter half of 2019, alongside higher oil prices, leaving bond yields exposed to upside data surprises and a repricing of expectations for inflation and rate hikes (Chart of the Week). We continue to recommend a below-benchmark overall portfolio duration stance on a 6-12 month horizon, as government bond yields are likely to rise above the very flat forwards in most markets. Chart 1A Bottoming Out Process For Bond Yields A Bottoming Out Process For Bond Yields A Bottoming Out Process For Bond Yields While maintaining a below-benchmark duration stance, the synchronized shift in central bank forward guidance justifies a review of the recommended country allocations in our model fixed income portfolio. Taking Stock Of Our Country Tilts In Our Model Bond Portfolio Global government bond yields peaked back in early November and have fallen in all of the major developed economies (Chart 2). Decomposing the move in benchmark 10-year yields into inflation expectations (using CPI swap rates) and real yields (the difference between nominal yields and CPI swap rates) shows that the bulk of that decline has come from lower real rates in the countries with positive policy rates (U.S., Canada, U.K. and Australia). For countries with zero or negative policy rates (core Europe, Japan), most of the yield decline has been due to falling inflation expectations. Yet the drivers of the decline in yields have changed from the latter two months of 2018 to the first few months of 2019. Generally speaking, the late-2018 bond market rally reflected falling inflation expectations, while recent changes have been a function of moves in real yields. Only in Australia have real yields and inflation expectations both declined steadily since the early November peak in global bond yields. Chart 2 The greater influence of the real component of yields makes sense, as markets now discount fewer rate hikes and more accommodative monetary policy. Currently, our recommended country allocation in the Governments portion of our model bond portfolio includes underweights in the U.S., Canada and Italy and overweights in Australia, the U.K., Japan, Germany, France and Spain (the latter is a position versus Italy within an overall underweight stance on Peripheral European debt). In light of the more ubiquitously neutral/dovish global policy bias, we are reevaluating those country tilts per the following indicators: 1. Cyclical growth indicators: Both manufacturing purchasing managers indices (PMIs) and the leading economic indicators (LEIs) produced by the OECD are well off the cyclical peaks (Chart 3). In terms of levels, the PMIs are holding above the 50 threshold, suggesting expanding manufacturing activity, in the U.S., U.K., Canada and Australia, but are below 50 in the euro area and Japan. Chart 3Growth Has Lost Momentum Everywhere Growth Has Lost Momentum Everywhere Growth Has Lost Momentum Everywhere 2. Market-based inflation expectations: 10-year CPI swap rates have generally stabilized alongside energy prices, after the sharp drops seen in the latter months of 2018 (Chart 4). Australia is the lone exception where expectations continue to drift lower. The correlations between CPI swap rates and oil prices denominated in local currency are strongest in the U.S. and Canada and weakest in Australia. There is great diversity of the levels of CPI swap rates, however, from as low as 0.2% in Japan to as high as 3.5% in the U.K. Chart 4Inflation Expectations Are Stabilizing Outside Of Japan & Australia Inflation Expectations Are Stabilizing Outside Of Japan & Australia Inflation Expectations Are Stabilizing Outside Of Japan & Australia 3. Our Central Bank Monitors vs. our 12-month discounters: Except for Australia, our Monitors are all hovering very close to the zero line, indicating no pressure on policymakers to move policy rates (Chart 5). Our 12-month discounters, which measure the interest rate changes over the next year priced into Overnight Index Swap (OIS), are all close to zero, as well (again, with the exception of Australia, where a full 25bp rate cut is already priced). Chart 5Our Central Bank Monitors Are Calling For Stable Policy (ex Australia) Our Central Bank Monitors Are Calling For Stable Policy (ex Australia) Our Central Bank Monitors Are Calling For Stable Policy (ex Australia) Just looking at these indicators, the ideal combination would be to underweight countries where yields are vulnerable to an upward repricing (PMIs still above 50, higher oil/CPI swaps correlations and no rate hikes priced) and to overweight countries where yields are less likely to rise (PMIs below 50, lower oil/CPI swaps correlations and where our 12-month discounters are not priced for rate cuts). Under these criteria, underweights in the U.S. and Canada are still justified, as are overweights in core Europe and Japan. The surprising firmness of the U.K. manufacturing PMI relative to the persistent downtrend in the U.K. LEI muddies the message a bit on Gilts, although the relatively high level of our 12-month discounter (still 13bps of hikes priced) is a bullish sign with our BoE Monitor now sitting right near zero. In Australia, the manufacturing PMI is also surprisingly firm but, the underlying weak momentum in overall Australian growth is leaving the door open to potential RBA rate cuts later this year. For all our country recommendations within our model bond portfolio framework, we always look at yields and returns on a currency-hedged basis in U.S. dollar terms. We do this to separate the fixed income component of global bond returns from the currency component. Yet when looking at the government bond yield curves in our model bond portfolio universe, hedged into USD, there is very little differentiation among those countries with the higher credit ratings (Chart 6). Only Spain (A-rated) and Italy (BBB-rated) have hedged yields that are outside the 2-3% range seen in the other major developed economies. Chart 6 From a fundamental point of view, those narrow yield differentials among the higher-rated markets largely reflect the convergence of trend economic growth rates. In a recent Weekly Report, we looked at the long-run growth rates of potential GDP and labor productivity for the U.S., euro area and Japan and noted that the differences between them were fairly modest.1 This justified narrow currency-hedged yield differentials between U.S. Treasuries, German Bunds and Japanese government bonds (JGBs). When we add Canada, Australia and the U.K. to the mix (Chart 7), we can see similar convergence of potential GDP growth to rates between 1-2% and long-run productivity growth around 0.5% (using OECD data for both). Chart 7No Major Differences In Long-Run Growth Rates No Major Differences In Long-Run Growth Rates No Major Differences In Long-Run Growth Rates The convergence is largely complete for all countries except Australia, where potential GDP growth is estimated to be 2.4%. Yet the long-run downtrend in potential growth is powerful and full convergence to the sub-2% levels seen in the other countries appears inevitable (and goes a long way in explaining the historically low level of Australian bond yields versus global peers). We can also see convergence in looking at the more recent history of the market pricing of the expected long-run neutral interest rate, using our real terminal rate proxy (the 5-year OIS rate, 5-years forward minus the 5-year CPI swap rate 5-years forward). Those measures for all of the major developed markets in our model bond portfolio are shown in Chart 8. The markets are pricing in real policy rate convergence, as well, with real rates expected to stay in a range between -0.5% (core Europe) and +0.5% (Canada). The U.K. is the one outlier, with the market pricing in a terminal real rate of -2%, although this likely reflects the markets discounting in the long-run effects of Brexit on the U.K. economy. Chart 8Markets Expect Near-Zero Real Terminal Rates (ex the U.K.) Markets Expect Near-Zero Real Terminal Rates (ex the U.K.) Markets Expect Near-Zero Real Terminal Rates (ex the U.K.) So what does all this mean for our recommended country allocations in our model bond portfolio? In Chart 9, we show the relative performance of the each country, hedged into U.S. dollars and duration-matched) versus the Bloomberg Barclays Global Treasury Index. Our overweight tilts are in the top panel, while our underweight tilts are in the bottom panel. Chart 9Sticking With The Country Allocations In Our Model Bond Portfolio Sticking With The Country Allocations In Our Model Bond Portfolio Sticking With The Country Allocations In Our Model Bond Portfolio Generally speaking, are recommendations have done well. Given our read on the indicators above, we see little reason to change the allocations. Our biggest concerns would be the underweights in Canada and Italy, given the sharp weakening of growth in both countries. For Italy, however, we view that as a negative given Italy’s high debt levels that require faster nominal growth to ensure debt sustainability. A more dovish ECB should help keep European bond volatility low, to the benefit of carry trades like Italian government bonds. However, we prefer to play that through our overweight in Spain while we await signs of stabilization in the Italian LEI before upgrading Italy in our model bond portfolio. As for Canada, we plan on doing a deeper dive on their economy and inflation trends in next week’s report before considering any changes to our allocation. Bottom Line: We are sticking with our current country tilts in our model bond portfolio, as the recent shift in central banker biases has done little to change the relative fundamental drivers between countries. Stay underweight the U.S., Canada & Italy, and overweight core Europe, Japan, the U.K., Spain & Australia, in currency-hedged global government bond portfolios.   Robert Robis, CFA, Chief Fixed Income Strategist rrobis@bcaresearch.com     1 Please see BCA Global Fixed Income Strategy Weekly Report, “Europe & Japan: The Anchor Weighing On Global Bond Yields”, dated February 26, 2019, available at gfis.bcaresearch.com Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Pervasive Uncertainty, Persuasive Central Banks Pervasive Uncertainty, Persuasive Central Banks ​​​​​​​ Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights All the U.S. data look broadly similar to us, …: The data series are decelerating, one by one, but they generally remain at a fairly high level relative to history. … and we have begun sounding like a broken record in our morning meetings, … : “There’s no doubt that [insert data series name here] is slowing, but it’s still nowhere close to heralding a recession. As a matter of fact, it remains at a level consistent with above-trend growth. That’s what we should expect given the pattern of fiscal thrust across last year and this year, combined with still-accommodative monetary policy.” … so we’re revisiting our checklists to see if we should change our bearish rates and bullish equities views: We periodically review our checklists, which we rolled out in the fall, to assess whether or not our positioning rationale still applies. Our recommendations may still be the same, but at least we put them to the test: The business cycle, the inflation outlook, the Fed’s reaction function, the corporate profit outlook, and valuations have not changed enough to dictate changing our views. We continually seek out evidence that we’re getting it wrong, but we haven’t found any in the current data. Feature We have become a bit self-conscious about offering our take on the latest U.S. economic data releases at BCA’s daily morning meetings. It’s one thing to be out of step with the prevailing view, or to offer a novel theory that fails to achieve much traction in the room. (Strategists who don’t get shot down by their peers every once in a while aren’t pushing the conventional wisdom enough.) It’s quite another to keep recycling the same narrative, and we’re at something of a loss for a way to maintain our colleagues’ interest. Beep. You’ve reached the voicemail box of the U.S. Investment Strategy team. We believe today’s (insert series name here) release indicates that while the U.S. economy is decelerating, it continues to be on a path to grow at, if not above, trend in 2019. This is consistent with the 60-basis-point decline in fiscal thrust from 2018 to 2019. That decline is large enough to ensure deceleration in 2019, but the 40 bps that’s still going to be deployed this year is also sufficient to ensure that the economy will be able to grow above its 2% trend rate, provided the rest of the world does not fall apart. Thank you for your call, and please do not hesitate to call again if we can be of any further assistance. Beep. We created our bond upgrade and equity downgrade checklists last fall to help guard against sticking with our views beyond their sell-by date. Both checklists have a negative bias, in that they’re meant to help reveal the points at which the underpinnings of our views no longer apply. The bond checklist is broadly geared to identifying either, one, the presence of slack in the economy that might call for easier policy, or, two, a convergence of the fixed-income markets’ views with ours that would limit the potential payoff from maintaining below-benchmark duration positioning.1 Our equity downgrade checklist looks out for signs of an approaching recession, pressure on corporate earnings, inflation pressures that might inspire the Fed to remove accommodation in a hurry, or signs of euphoria that can’t be sustained.2 Reviewing the data series that comprise the checklists did not lead us to change our views. The exercise does help us adhere to a process, however, and we think they help keep us from falling into an analytical rut. We will revisit them with increasing frequency as the cycles we’re trying to track approach their inflection points, while keeping an eye out for any new indicators that might broaden their insights. Is A Bearish Rates View Still Appropriate? The first section of our bond checklist (Table 1) focuses on market perceptions of the Fed. Following our U.S. Bond Strategy service’s golden rule, if the Fed hikes more than it is expected to hike, long-duration positions will underperform. If it hikes less than expected, long-duration positions will outperform. As implied by the overnight index swap (OIS) curves, the money market now expects that the fed funds rate has peaked at 2.5%, and that a rate cut will likely bring it down to 2.25% by the end of 2020 (Chart 1). Table 1Bond Upgrade Checklist Status Quo Status Quo Chart 1Markets Are Pricing In A Rate Cut Markets Are Pricing In A Rate Cut Markets Are Pricing In A Rate Cut We beg to differ. With little to no slack remaining in the economy as a whole (the output gap is closed), and unemployment well below its natural level and poised to fall further, we think inflation pressures are percolating below the surface. Once they begin to reveal themselves, we expect the Fed will have no choice but to resume its tightening campaign. Our estimate of the equilibrium rate (3% now, rising to about 3⅜% by year-end) appears to be well above the financial markets’ estimate, and we therefore believe the Fed has plenty of room to hike without capsizing the economy. An inverted yield curve has historically been a reliable sign that the Fed has gone too far in its efforts to prevent overheating, and we are watching it now for hints that the fed funds rate may be done rising. Though the curve flattened considerably as the 10-year Treasury yield plunged in the fourth quarter (Chart 2), we think it’s very unlikely to invert while the Fed is on hold. An on-hold Fed implies that the 3-month bill rate will remain in the mid-to-high 2.40s and that the 10-year Treasury yield would have to dip below 2.5% for the curve to invert. Such an outcome would be completely incompatible with below-target inflation and above-trend economic growth. Chart 2The Yield Curve Has Flattened, But Inversion Is A Stretch The Yield Curve Has Flattened, But Inversion Is A Stretch The Yield Curve Has Flattened, But Inversion Is A Stretch Inflation is not yet an issue on most investors’ radar screens because it has been conspicuously missing in action around the developed world for the last ten years. In the U.S., headline measures rolled over upon oil’s slide, masking the fact that the core measures are hovering around 2% and remain in uptrends (Chart 3). Inflation break-evens have plunged, and are well below the 2.3-2.5% level that is consistent with the Fed’s 2% inflation target, but their decline was nearly entirely a function of the decline in oil prices (Chart 4). Our Commodity & Energy Strategy service is calling for higher crude prices across the rest of this year, so even though we’ve checked the break-evens box, we expect we’ll be unchecking it as the break-evens reverse in step with oil. Chart 3Headline Inflation's Decline ... Headline Inflation's Decline ... Headline Inflation's Decline ... Chart 4... Is An Oil Story ... Is An Oil Story ... Is An Oil Story The labor market remains quite tight. Although the unemployment rate ticked up in December and January, it came down again in February and remains below the estimated natural rate of unemployment where upward wage pressures typically begin to take hold (Chart 5, top panel). Unemployment ticked higher in December and January, despite robust job gains, because the share of working-age Americans participating in the labor force rose. The exodus of the baby boomers from the work force will make it very difficult for the participation rate to keep rising, however (Chart 5, middle panel), and the elevated level of workers quitting their jobs (Chart 5, bottom panel) indicates that employers are poaching workers from one another, driving wages higher. Chart 5The Labor Market Is Tight And Getting Tighter The Labor Market Is Tight And Getting Tighter The Labor Market Is Tight And Getting Tighter Instability is a double-edged sword as it relates to monetary policy. The Fed is likely to return to hiking rates if it believes it can cut off rising instability before it goes too far. If instability is far enough advanced that it threatens the economy, however, the Fed may well ease policy to try to counteract it. For now, it appears to us that the key cyclical segments of the economy are on track to keep warming up, but are nowhere near overheating (Chart 6). We are not overly concerned about the frisky lending climate that Governor Brainard called out in September, but ongoing anecdotal reports of bond-market froth will presumably keep the Fed alert to the need to dial back accommodation. Acutely bad conditions elsewhere in the global economy would make the Fed consider rate cuts, but if the rest of the world perks up by mid-year, in line with BCA’s base case, the Fed will feel less urgency to indemnify the U.S. against foreign distress. Chart 6Cyclical Segments Are Warming Up Cyclical Segments Are Warming Up Cyclical Segments Are Warming Up Should We Still Be Constructive On Equities? Every box in our equity downgrade checklist remains unchecked, starting with our silent recession alarms (Table 2). The yield curve has not inverted, and as we noted in the review of our rates checklist, we do not believe it will while the Fed remains on hold. Growth has come off the boil, but the LEI is not close to contracting on a year-over-year basis (Chart 7). The fed funds rate remains below our estimate of equilibrium, as we expect it will for the rest of the year, and the three-month moving average of the unemployment rate has not risen by a third of a percentage point from its current cyclical bottom. Table 2Equity Downgrade Checklist Status Quo Status Quo Chart 7The LEI May Be Decelerating, But It's Still A Ways From Contracting The LEI May Be Decelerating, But It's Still A Ways From Contracting The LEI May Be Decelerating, But It's Still A Ways From Contracting Labor market tightness will eventually manifest itself in higher wages, which will squeeze corporate profit margins, but until real wage gains begin to outstrip productivity growth (i.e., until labor starts capturing a bigger piece of the pie), corporate earnings will not be at risk (Chart 8). The dollar has spent the last several months going sideways, and BBB corporate yields are now below their level when we rolled out the equity checklist in mid-October (Chart 9). The savings rate has backed up to near the top of its six-year range, and we would check the box if it were to break out of it (Chart 10). There have been no blowups in EM or anywhere in the rest of the world that cast a shadow over U.S. corporate earnings. Chart 8Wage Growth Doesn't Cut Into Profits Until It Outstrips Productivity And Inflation Wage Growth Doesn't Cut Into Profits Until It Outstrips Productivity And Inflation Wage Growth Doesn't Cut Into Profits Until It Outstrips Productivity And Inflation Chart 9Round Trip Round Trip Round Trip Chart 10The Savings Rate Has Risen, But Not Enough To Check The Box The Savings Rate Has Risen, But Not Enough To Check The Box The Savings Rate Has Risen, But Not Enough To Check The Box As noted in our bond checklist comments, above, core inflation measures have dipped below 2% but remain in an uptrend. Both headline CPI and the inflation break-evens relapsed with oil prices, but we expect that a crude recovery will help restore inflation expectations. Bull markets tend to end amid a general feeling of euphoria, and we therefore continue to keep an eye out for signs of over-exuberance. Valuations are elevated but hardly extreme, and we don’t see anecdotal indications of widespread silliness, or suspension of disbelief. Investment Implications From our perspective, overheating in the U.S. remains a very real possibility. Since that is a distinctly minority view, the potential reward for underweighting Treasuries and holding all bond exposures below benchmark duration is alluring. We reiterate our recommendations that investors underweight Treasuries and maintain below-benchmark-duration across their fixed-income portfolios. We expect we will continue to do so until the U.S. economy weakens, or the Treasury curve begins to price in some of our bearish rates view. We reiterate our cyclical recommendation to overweight equities despite the tactical caution we expressed last week.3 We simply expect that the S&P 500 will have to consolidate some of its rapid year-to-date gains before moving on to an eventual new cycle high at 3,000 or above. Stocks don’t go straight up, even if they did for nearly all of January and February, and it is reasonable to expect elevated volatility in the latter stages of a bull market. We thought that the 2,800 level might provide some technical resistance, offering tactically oriented sellers an attractive point to reduce equity exposures, while tactically oriented buyers were likely to find better entry points going forward.   Doug Peta, CFA Chief U.S. Investment Strategist dougp@bcaresearch.com   Footnotes 1 Please see the U.S. Investment Strategy Weekly Report, “What Would It Take To Change Our Bearish Rates View?,” published September 17, 2018. Available at usis.bcaresearch.com. 2 Please see the U.S. Investment Strategy Weekly Report, “Introducing Our Equity Downgrade Checklist,” published October 15, 2018. Available at usis.bcaresearch.com. 3 Please see the U.S. Investment Strategy Weekly Report, “How Much Do U.S. Equities Have Left?,” published March 4, 2019. Available at usis.bcaresearch.com.

Feature The GAA DM Equity Country Allocation model is updated as of February 28, 2019. The quant model increased allocations to Spain, Italy, Sweden and Germany at the expense of the U.S., the Netherlands and Switzerland. As such, now the model underweights the U.S., Japan, the U.K, France, Canada (downgraded from overweight) and Australia, while overweighting Germany, Spain, Italy, Switzerland and Sweden (upgraded from underweight), as shown in Table 1. Table 1Model Allocation Vs. Benchmark Weights GAA Quant Model Updates GAA Quant Model Updates As shown in Table 2 and Charts 1, 2 and 3, the overall model outperformed the MSCI World benchmark by 18 bps in February, with a 54 bps of outperformance from the Level 2 model offset by a 9 bps of underperformance from Level 1. Since going live, the overall model has outperformed by 148 bps, with Level 2 outperforming by 267 bps and Level 1 outperforming by 29 bps. Table 2Performance (Total Returns In USD %) GAA Quant Model Updates GAA Quant Model Updates Chart 1GAA DM Model Vs. MSCI World GAA DM Model Vs. MSCI World GAA DM Model Vs. MSCI World Chart 2GAA U.S. Vs. Non U.S. Model (Level 1) GAA U.S. Vs. Non U.S. Model (Level 1) GAA U.S. Vs. Non U.S. Model (Level 1) Chart 3GAA Non U.S. Model (Level 2) GAA Non U.S. Model (Level 2) GAA Non U.S. Model (Level 2) ​​​​​​​ Please see also the website http://gaa.bcaresearch.com/trades/allocation_performance. For more details on the models, please see Special Report, “Global Equity Allocation: Introducing The Developed Markets Country Allocation Model,” dated January 29, 2016, available at https://gaa.bcaresearch.com. Please note that the overall country and sector recommendations published in our Monthly Portfolio Update and Quarterly Portfolio Outlook use the results of these quantitative models as one input, but do not stick slavishly to them. We believe that models are a useful check, but structural changes and unquantifiable factors need to be considered too in making overall recommendations.   GAA Equity Sector Selection Model We are happy to reintroduce the GAA Equity Sector Selection model after we suspended it as of October 2018 following the GICS adjustments to global sector composition. As noted in our September 2018 Special Alert and October 2018 Quarterly, the most notable changes occurred in the new Communication Services sector (previously known as Telecommunication Services) and the Information Technology sector, whereas the Consumer Discretionary sector had various yet insubstantial movements in and out of the sector. Having received historical performance of the revised data, we have retested and adjusted various inputs in the model to match the cyclicality of the revised sectors. We were able to backtest the model to only June 2008 as this was the starting point of the revised data. Given the nature of firms that are now included in the global Communication Services sector, we revised our classification of this sector from a defensive to a cyclical. Hence, it will be positively impacted by the model’s growth component. Furthermore, we have introduced Real Estate as its own sector (following its removal from Financials in August 2016). Additionally, we have neutralized the impact of the liquidity component on the Real Estate sector; in other terms, we found no evidence that the Fed cycle affects this sector in any of its four phases. We also revised the valuations component by shortening the confirming signal of our technical indicator from a 12-month to a 6-month moving average. To properly assess the model’s adjusted performance, we have reset the “since going live date” to begin in March 2019. However, the historical backtested performance of the model will still be shown in Chart 4. Additionally, we show the old model’s performance vs. its benchmark (Table 3). Chart 4Overall Model Performance Overall Model Performance Overall Model Performance Given the above, and following our Monthly Update that was released yesterday, the model corroborates our slightly cyclical stance by overweighting Industrials and Materials (Table 4). Additionally, the model’s biggest underweight shift from last month was on Consumer Staples as the momentum indicator significantly deteriorated. The model is overweight Utilities due to positive inputs from its momentum and liquidity components. Table 3Old Model’s Performance GAA Quant Model Updates GAA Quant Model Updates Table 4Current Model Allocations GAA Quant Model Updates GAA Quant Model Updates ​​​​​​​ For more details on the model, please see the Special Report “Introducing The GAA Equity Sector Selection Model,” dated July 27, 2016, available at https://gaa.bcaresearch.com.   Xiaoli Tang, Associate Vice President xiaoliT@bcaresearch.com   Amr Hanafy, Research Associate amrh@bcaresearch.com