Macro Strategy Chartbook August 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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US economic growth is solid, as economists are predicting 4 per cent growth in Q2. Overseas economies are posting better than expected results after disappointing forecasters last month.

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Liquidity measures improved last month after coming close to a breakdown. Credit spreads contracted incrementally and volatility subsided somewhat. The yield curve continues to flatten, however, although intermediate rates are tethered to an easy ECB.

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Headline worries frightened investors over the last few weeks, pushing sentiment toward bearishness. That’s a good sign for this contrary indicator.

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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 market equites and a breakout in small caps relative to the S&P 500.