Macro Strategy Chartbook October 2018

Executive Summary

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Valuation is high by historical standards, reaching levels not seen since the tech bubble. Investors are taking comfort in artificially low interest rates. By our measures, the 10-year Treasury yield should be 4.5%, not 3.0%. Easy monetary policies abroad are keeping a lid on intermediate-term rates.

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The escalating trade dispute has the potential to impair favorable fundamentals, driving inflation and interest rate higher. Our models suggest the 4% growth rate achieved in Q2 is not sustainable without eating into capacity.

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Liquidity conditions improved incrementally last month, buying risk takers more time. Lenders are willingly extending credit. High yield bond spreads do not adequately reflect the level of non-financial corporate debt in circulation.

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Inflation pressure has increased incrementally as the job market continues to tighten. We anticipate 3-plus % wage year-over-year gains in the coming months. Iran sanctions will put upward pressure on crude prices.

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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.