Macro Strategy Chartbook October 2018

Executive Summary

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.

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.

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.

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.

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.

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