SUMMARY
ECONOMIC CALENDAR
CYCLE QUADRANTS
The speed of the reflation through 1H21 increases the odds that 2H21 will see decelerating growth and inflation (with increased volatility)
Continued deceleration expected in year-over-year growth and inflation, but absolute inflation level still expected to be elevated in 2022
WEEKLY ASSET CLASS RETURNS
GROWTH, INFLATION & POLICY
Global manufacturing activity improved at a slower pace in August with developed countries fairing significantly better than emerging countries
65% of U.S. population has had at least one dose whereas 56% are fully vaccinated
Industrial production and leading indicators have peaked as base effects have waned
Trend of U.S. unemployment claims and equity drawdowns begs question: will this cycle peak before the labor market is healed?
Global inflation remains elevated due to higher commodity input costs, labor tightness, housing prices, etc.
Price increases have decelerated ahead of indicators, but trend remains intact; capacity utilization has started to normalize
Market-implied inflation expectations remain elevated; the market may be starting to question the “transitory inflation” narrative
Real yields have continued to trend lower; gold was rallying, but weakness continues after initial selloff on July Payrolls data
Relative rate expectations are getting dramatic, driving dollar strength in recent months
Expansion continues – three-month average increase of $92 billion brings Fed balance sheet to a staggering $8.4 trillion
EQUITY
U.S. large cap stocks fell the most in September as interest rates rose and valuations remain higher than in international and emerging markets
FAAMG underperformed S&P 500 ex-FAAMG by 4% in September
GLOBAL EARNINGS CALENDAR
Sales and earnings growth expected to decelerate against tougher comps in 2H, but still to remain strong for the rest of the year
The VIX rose over 30% in September as the S&P 500 declined just 4% from its all-time high
Unprecedented policy support has helped 2021 become one of the least volatile years for stocks in half a century
U.S. equity valuations remain stretched, but strong earnings growth has closed the gap dramatically since the start of the year
Cyclically-adjusted P/E (CAPE) multiples by country; >4% yields in Turkey, Russia, Brazil and United Kingdom
In recent pullback, equity sentiment dropped sharply from high levels; sentiment is no longer a near-term risk factor
Value has outperformed growth since the vaccine announcement; growth’s recent outperformance may be a sign of the trend reversing
Growth valuations remain substantially elevated versus history, value valuations below average
EM equities remain relatively cheap vs. developed markets, but “value trap” risk remains due to less policy support and slowing growth rates
The weight of technology and consumer discretionary stocks in the S&P 500 fell slightly to 39% in September, still near record high
Renaissance IPO Index fell in September and is now 16% off of ATH, S&P 500 is down 4% from its ATH
FIXED INCOME & CREDIT
High yield bonds and bank loans held up well in September, outperforming other fixed income and credit categories
Treasury yields rose in September as inflation remains elevated and treasury issuance is expected to accelerate in 4Q
The Treasury yield curve has steepened modestly year to date
3-month/ 10-year treasury spread widened in September potentially on supply and inflation concerns
Muni-treasury ratio: short-term muni yields look relatively attractive while LT munis are only slightly above Treasuries on a taxable-equivalent basis
Mortgage rate spread vs. 10-yr Treasury narrowed in September
Credit spreads below median across sectors with very few pockets of opportunity
Credit spreads were mixed in September, broadly remain near June lows
High yield-to-IG muni spreads near tightest levels since 2007
High yield spreads through the COVID-19 crisis speak to episodic nature of volatility
REAL ASSETS & INFRASTRUCTURE
Performance across real assets was mixed in September
Crude and gas inventories rose modestly but remain near lowest levels in 5 years
As expected, the snapback in energy consumption is outpacing production; production may match consumption in 1Q 2022
Putting the rally in broad commodities in context
Real yields and aggregate amount of global negative yielding debt fell in September, gold weakness continued
OPPORTUNISTIC
Closed-end funds showed weakness in September but are still outperforming the opportunistic space year-to-date
CEF discounts widened in September, remain >1 σ above average
CEF discounts mixed by sector, taxable bond CEFs still trading at a premium
ASSET ALLOCATION
U.S. Dollar Index will be driven by real yields and relative deficit and monetary policy expectations of Fed, ECB, BoJ
Modest improvement in twin deficit may be providing some support for USD
Futures spec positioning shows shorts in several commodities, U.S. tech positioning (NASDAQ) turned bearish in September
Copper/Gold ratio corroborated the local high in Treasury yields, potentially signaling an increase in rates
Expected returns for passive “60/40” portfolio near all-time low
The case for a structural change to strategic 60/40 allocations
