Robust earnings and stellar balance sheets helped propel technology to the top of our rankings. Technology remains a preferred sector, scoring well across all factors except price momentum. However, given the limited room for further spread compression and a still superior long government bond forecast, we decided to further underweight high yield bonds in favor of long government bonds.įrom a sector perspective, we maintain our targeted allocations to technology and communication services but split out our current consumer staples position with materials. Solid equity returns have produced firm price momentum, which implies spread tightening for high yield bonds. Further, our proprietary leading economic indicators are stronger relative to the one-year lookback, suggesting additional curve flattening. Surging realized inflation has produced a recovery in market-based inflation expectations, which remain elevated and imply the curve should flatten. Within fixed income, our model forecasts a flattening of the Treasury curve, which buttress the optimistic outlook for long government bonds. Improvements in price momentum support European equities, which also benefit from strong sentiment and macro forecasts. Strong earnings and sales sentiment combined with positive price momentum and macro scores continue to buoy US equities.

Within equities, we held our regional exposures constant, maintaining a preference for US and European equities. Our expectations for core bonds continue to weaken with our models now forecasting a small rise in interest rates, which reinforces our current underweight. Strong sentiment and price momentum underpin our constructive equity forecast, while commodities remain supported by an advantageous curve structure. Implied volatility on currencies increased during the latter part of August but still reflected a sanguine risk environment.Įquities and commodities remain favored by our quantitative framework and we have preserved our sizable overweight to both. Risky debt spreads narrowed during the month, while implied volatility on equities declined, moving further into low-risk territory. Despite concerns about moderating economic growth and the potential for the US Fed to initiate tapering, investor sentiment remained positive.

Risk appetite is still supportive of growth assets as evidenced by our Market Regime Indicator (MRI), which finished August in a low risk regime. Overall, the still favorable macroeconomic outlook and favorable quantitative forecasts reinforce our preference for risk assets (Figure 1). Lastly, wages have moved higher and there are indications that this trend may persist, providing a further boost to consumers. The unemployment rate continued to tick down, which bodes well for future economic activity. It is possible that the August data will also be revised higher at some point. Employment figures in August were a disappointment relative to consensus estimates, but there was a large upward revision to numbers of the prior two months. Central banks have begun to discuss tapering, but monetary policy will remain accommodative with rate hikes and balance sheet reductions likely to remain on hold for now. The Conference Board’s LEI index improved again in July and remains in an uptrend, indicative of strong economic growth in the second half of the year. Improving leading economic indicators (LEI) give reason to believe earnings will remain strong. It was also noted that 87% of US companies delivered positive earnings surprises, the highest since 2000, while 62% of European companies exceeded expectations, the third best season on record. Bank of America noted that the earnings story remains robust with consecutive blockbuster seasons. Service sector activity continues to exhibit strength, and even though the recent purchasing managers' index numbers have slipped, they remain above the expansionary 60 level for a record sixth consecutive month. Similarly, monetary and fiscal policy will become marginally less favorable, but households should be able to draw on accumulated savings.ĭespite these near-term headwinds, the underlying fundamentals remain firm and we continue to expect positive economic growth. The pace of corporate earnings improvements will slow but should remain healthy. Some moderation in economic growth ought to be expected as it is difficult to maintain the torrid pace that we have witnessed so far. However, much of the softening can be attributed to ongoing logistical bottlenecks and resurgent COVID-19 fears, which should prove to be transitory. On the surface, disappointing data prints have further stoked fears of peak growth and have at points introduced anxiety into markets.

Macro trading