Minutes from the Federal Reserve Open Market Committee (FOMC) March meeting highlight key aspects of the committee’s thinking, including the committee’s intent to reduce its balance sheet gradually over time.
The spread between 30-year US treasuries and 10-year US treasuries has fallen to just 60 bps which is the smallest spread in about 2 years.
While the myth that stock market returns are highly correlated to a country’s GDP growth rate has largely been debunked, there remains a strong, and intuitive, relationship between corporate profits and GDP.
CPI excluding food and energy (core-CPI) increased by 31 bps in January for the largest one month increase since March 2006. Headline CPI increased to 2.54% year-over-year which is the fastest growth rate since March 2012.
Equity returns and earnings estimates should presumably be related. It makes intuitive sense that if earnings estimates are increasing for a sector than equity prices for that sector should trend upwards as well. And this broadly holds up except oddly with the health care sector.
Just 44% of developed market stocks have outperformed the MSCI World Index over the past 200 days compared to 57% outperforming on average over the past 15 years.
The Boom-Bust Barometer (made famous by Dr. Ed Yardeni) is a simple, but effective, way of avoiding large drawdowns in the stock market. This indicator is calculated by taking the CRB Raw Industrial Price Index divided by initial unemployment claims.
Out of 24 developed market industry group, six currently look overbought in the short-term. Two come from the financial sector, two come from the technology sector, one from consumer staples sector (surprisingly) and one from the materials sector.
After underperforming in 2016, growth stocks have once again started to outperform value stocks in 2017. As the chart below illustrates, the S&P 500 Value Index consistently outperformed the S&P 500 Growth Index from 2002-2006.
The stronger dollar is flowing through into our purchasing power parity (PPP) CPI differential models. Overall against 18 currencies, the USD is overvalued against 12 of them on a PPP basis.