Since the start of this year, the US Treasury market is signaling a scenario of rising growth expectations and falling inflation expectations, as reflected by the various components that comprise interest rates.
With some exceptions, smaller-cap stocks in the US tend to pay higher taxes than their larger-cap peers. As such, speculation that corporate tax rates may be cut has stoked the performance of US small caps recently.
Employing basic bond math, we can decompose the US Treasury bond into two pieces: real rates and break-even inflation expectations. Because real rates (TIPS) and nominal rates (US Treasuries) are directly observable, break-even inflation is relatively easy to determine.
Indicators of market breadth are often useful in confirming or telegraphing important trend changes in equity markets. In simple terms, indicators of market breadth measure the level of participation of individual stocks in the general trend of the market.
Since the middle of August the S&P 500 energy sector is up 11.5% compared to just 3% for the index as a whole. Many observers have chalked this outperformance up as a reaction to a deep oversold condition or a short covering bounce, but a growing amount of evidence suggests it may be more than that.
The Federal Reserve officially signaled the beginning of its balance sheet run-off. At this point, that’s old news. But, today the Fed released the Z.1 Flow of Funds, which adds to the intrigue of the balance sheet run-off. Why?
The Federal Reserve is likely to decide next week to begin letting assets roll of its balance sheet as bonds mature, instead of reinvesting the proceeds. This means that the balance sheet will begin to shrink in size and other market participants will be forced to absorb the supply of new issuance of treasury and mortgage backed securities.
Knowledge Leaders Strategy mid-quarter update.
The upturn in global PMIs over the last year has been substantial and for the first time in years the world’s developed economies appear to be expanding in unison. As we can see in the table below, the color of the board has moved from red to green, indicating that nearly every major DM country is seeing improving PMIs.
We’ve been talking at length recently about the attractiveness of foreign, cyclical stocks. While foreign developed markets are attractive, emerging markets are especially attractive from a valuation perspective and are also benefiting from what we think is just the beginning of a persistently weak US dollar environment.