Asset Allocation
We reveal what our most-trusted leading indicators are predicting about the major economies, and end with a provocative conclusion.
Recent shifts in the Fed's policy stance are bullish for the dollar, negative for commodities and emerging markets, and positive for assets with a yield. They also suggest risk assets will continue to perform decently.
Chair Janet Yellen's comments at Jackson Hole reinforce our view that a Fed rate hike is highly unlikely until December. The risk is that overbought equity and junk bond markets correct as an oversold dollar prices in a December move.
The equity rally has been in a holding pattern, with some tactical fraying around the edges.
In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.
Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.
Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.
Mental Accounting Bias creates an irrational attraction to yield, while The Halo Effect incentivizes companies to generate yield. Neither phenomenon is sustainable. We identify three sectors to avoid, and two to own.
Commercial real estate and REITs have benefited greatly from accommodative monetary policy. Though they are approaching a peak, our analysis shows that they remain in a "goldilocks" scenario and still offer plenty of upside.
The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.