Macro Strategy Chartbook July 2018

Executive Summary

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Valuation is presenting a mixed picture. Shorter-term, the S&P 500 appears cheap, but investors increasingly believe that we’re approaching peak earnings. Longer term, blue chips are trading above the 80th percentile of their historical range, exceeded only by the tech bubble.

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Economists are penciling in 4 per cent growth in the US, but international economic data is falling short of expectations. China’s economy appears to be slowing. European growth has been disappointing, too.

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Liquidity indicators are tightening as the yield premium lenders require to extend credit has increased over the last few months. A breakdown in liquidity would prompt us to reduce risk. The ECB’s intention of keeping overnight rates at zero for the next four quarters was a surprise that will likely keep a lid on intermediate interest rates.

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Investor sentiment moved back to neutral territory last month. Headline-weary investors are showing little conviction at the moment.

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Technical conditions remain in “risk-on” mode, although technicals tend to be a lagging indicator. Particularly interesting was the breakdown between emerging markets equities and a breakout in small caps relative to the S&P 500.