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The Fed said they were running a very restrictive policy that would cause pain. Most observers believed that would lead to a painful recession. But there were many signs the policy was not as restrictive as the Fed claimed. Seven individual indicators help explain why there has been no recession.
Mega-cap tech stocks drove earnings growth in 2023 and are expected to outpace again in 2024. S&P 500 ex. Mag 7 EPS growth is expected to turn positive, and valuations suggest a lot of good news is priced into the Mag 7. Our models have begun to shift from Growth to Value, so we have Value on watch for a tactical upgrade.
Insufficient evidence for downgrading U.S. from overweight or upgrading U.K. from underweight. Along with regional model and ACWI Scorecard, watch U.S./U.K. and Tech/Energy ratios, which are positively correlated. Continuing U.S. and Tech outperformance would be consistent with ongoing cyclical and secular bull markets.
Real GDP growth moderated substantially in Q1, dragged down by net exports and inventories. But domestic demand was still strong, driving up inflation pressures. Confirms a delay in Fed rate cuts. Jobless claims continue to decline, reflecting strong labor demand. Pending home sales rise, pointing to a modest uptick in existing home sales in the near-term.
The election cycle suggests more defensive leadership in the run-up to the November election. Within cyclicals, Growth sectors tend to be weakest during election years. The Nasdaq Cycle Composite is weaker than the DJIA Cycle Composite for much of the remainder of the year, implying more Value leadership.
We highlight several indicators of credit conditions that we regularly monitor. IG and HY spreads remain tight and continue to perform well. But problems are building in the consumer and small business sectors.
Economic activity increases in most states in March. Recession odds remain low. Durable goods orders rise, led by civilian aircraft. Architecture billings decline sharply, pointing to weaker commercial construction spending ahead. Mortgage applications slide, amid a renewed rise in mortgage rates.
We maintain our long BTC position for now but should our favorite short-term technical indicator turn bearish or Bitcoin break below $61,000, we would likely downgrade.
Oversold with another higher low in sentiment, lower high in VIX. Fab Five Tape Component would confirm that a bottom is in place. U.S. Index oversold relative to ACWI.
Labor market balance has improved across industries, but a majority still show tighter conditions than pre-pandemic. Labor shortages are most pronounced in health care, financial activities, wholesale trade, and professional and business services. The labor demand/supply ratio points to an upside risk to wage growth and inflation this year.
Services activity moderates. Manufacturing slips back in contraction territory. But new home sales rebound.
Employment and demand-related indicators drive growth in March.
Reducing U.S. to a marketweight 54% from an overweight 58%. Increasing Europe and Japan each by 2%. Further increasing the Europe overweight to 32% from 30%. Reducing the underweight for Japan to 7% from 5%. Fundamentals and technicals argue against keeping the U.S. at overweight.
The Fab Five Tape Component has fallen from bullish to neutral. Big Mo Tape, the U.S. Stock Market Model Internal Composite, and a stochastic indicator are responsible for the deterioration. Watch volume supply versus volume demand for signs sellers are gaining the upper hand.
Weekly talking points and key visuals from NDR strategists' insights.
The good news is, we are enjoying better productivity now from strong IT/cloud investments made before/into COVID. The bad news is, we may need more investment and wait longer than some expect for AI to pay off.
Economic growth has picked up in late Q1. Leading indexes and our ETM suggest the expansion will continue in the near term. Stronger demand has led to firmer inflation, pushing off Fed rate cuts. On balance, the outlook is positive for topline earnings growth and stock prices.
LEI resumes its decline, but the downtrend softens. Economy continues to expand. Philly Fed manufacturing activity strengthens. Jobless claims remain low. But existing home sales drop, amid high mortgage rates and tight inventory.
Dollar, interest rates, and monetary & fiscal policy represent risks to the continuation of cyclical sector leadership. The sector model still sides with cyclical sectors over defensive sectors, but the spread has narrowed since the start of the year. Watching technical developments for signs of a defensive rotation.
Upgrading U.S. Dollar from bearish to neutral. Long-term technical composite has joined short and intermediate-term composites on buy signals. But upside potential limited by excessive optimism and overvaluation. Low volatility, inconsistencies and the lack of confirmation also argue against a bullish position.
Shifting 5% from stocks to cash for U.S. asset allocation, but still 10% overweight stocks. The U.S. asset allocation model, Big Mo Tape, and Fab Five Tape have all weakened. Economic strength, earnings growth, and long-term momentum support the case for the long-term uptrend in equities to remain intact.
While the miners look fairly valued, measures of sentiment offer a mixed message. Additionally, in the immediate term, both look overbought and are trading near resistance levels. We'd view consolidation relieving excessive optimism and overbought conditions without breaking below previous resistance levels as bullish. We have the Global X Copper Miners ETF (COPX) on watch for an upgrade. A breakout above resistance or a successful retest of previous support are likely levels for our entry.
It will take more time for the Fed to achieve greater confidence in hitting their inflation goal. Fed not considering additional rate hikes. Current policy is restrictive. Market has bear steepened. Two-year Treasurys attractive above 5.00%.
Eurozone recession risk fell dramatically in March according to our watch report. Lower inflation, rising real wages, and the prospect of ECB easing support the recovery. However, upside is limited due to weak potential growth, high ULC, and structural issues in Germany.
Short-term sentiment has fallen to the lowest level since November 2023, and ETF flows have pulled back. The Fab Five Sentiment Component just turned neutral. Relative valuations for stocks have returned to levels last seen before the Great Financial Crisis.
Industrial production rises in line with expectations. Manufacturing output picks up. Housing starts and permits drop.
Retail sales rise more than expected, driven by online purchases. Homebuilder sentiment holds steady. Business inventories rise. Empire manufacturing continues to contract.
Increasing geopolitical tensions will help keep commodity prices supported. Rising gold is a reflection of geopolitical risk and the New World Order. Implications are inherently inflationary and results in a flatter path to neutral.
Seasonal and cyclical influences now challenging. The Fab Five Tape Component has dropped from bullish to neutral, as has the broader Fab Five Model. Prospects for a recovery from consolidation are supported by improving sentiment and oversold conditions... ...but a bearish Tape Component reading would increase the chances of a correction or worse.
Modest pullback in sentiment, but level and y/y momentum still bullish for growth. Inflation expectations pick up. Import prices rise more than expected.
In thinking about rate-sensitive themes Artificial Intelligence (AI) is not one that usually comes to mind. However, the 26-week correlation between AI RS and the LT Treasury Bond Index has been significant all year.
We identify and discuss five indicators that had been warning of economic weakness for several months to several quarters. Those messages have faded, if not refuted. Supports a weight-of-the-evidence approach to economic analysis.
Commodity advance consistent with economic expansion, supporting earnings outlook. Not currently warning of 2022 repeat, with worsening inflation outlook and interest rate pressures. Commodities trending higher with gold and equities, consistent with historical tendencies.
Upgrading Financials and Materials and downgrading Communication Services and Real Estate. The changes get us more in line with the sector model's recommendations. Inflation, Fed policy, and Q1 earnings will be key in determining whether recent model trends continue.
Higher services prices drive up PPI inflation. Suggests the Fed will likely delay rate cuts into 2H. Initial jobless claims decline, reflecting continued strong labor demand.
The correlation between the Russell 2000/1000 ratio and 10-year Treasury yield is near a record low. Interest rate sensitivity is overshadowing other positive technical, earnings, and macro factors. The stage is being set for a potential small-cap rally, but the rate regime may need to change first.
Reducing bond exposure to 100% of benchmark duration from 110%. Inflation remaining stickier than expected and getting harder to dismiss. Report does not give policymakers greater confidence in hitting inflation objective. Fed to remain patient and rate path will be higher for longer.
While U.S. inflation is accelerating, elsewhere in the world it's surprising to the downside, suggesting other major central banks could cut rates first. The good news is that equities still rise and the dollar tends to weaken in these instances, as long as the Fed eventually follows. A more worrisome development would be if the Fed increases rates while other parts of the world are easing policy.
Both CPI and core CPI rise more than expected in March, led by gasoline, shelter, and other services. Super-core inflation accelerates, likely to delay the start of Fed rate cuts past June. Mortgage applications imply a slow recovery in home sales. Wholesale inventories rebound in line with expectations.
While COVID and the "patent cliff" have been meaningful setbacks for Longevity, demographics are too good to ignore this theme.
Sentiment/valuation/positioning are all mostly negative along with the Fab Five Sentiment Component. But the Fab Five overall weight with a 360-degree look at macro, tape, and sentiment indicators remains bullish. What I am watching for an even more decisive bearish sentiment conclusion.
But year-to-year momentum consistent with trend economic growth. Although small business job demand is moving toward normalcy, inflation concerns have picked up.
There is some technical evidence to suggest that the worst of Europe/U.S. underperformance has passed. This is supported by more sanguine economic surprises and downside inflation surprises. But trends in forward looking economic indicators and earnings still favour overweighting U.S. relative to European equities.
Confusing cyclical indicators can make it tough for a data dependent Fed to make the right decisions. Several indicators such as the LEI, housing, and manufacturing have an early cycle feel. Others such as real rates, employment, and credit spreads argue for late cycle behavior.
The Catastrophic Stop model entered April fully invested. The International Equity Core model is overweight Canada, China, Japan, and Germany, while underweighting the U.K., Australia, France, and Switzerland. The Explore model favors Malaysia, Philippines, Poland, Sweden, and Taiwan.
The All-Country World ex.-U.S. Total Return Index gained over 320 basis points in March. The International Equity Core model is overweight Canada, China, Japan, and Germany, while underweighting the U.K., Australia, France, and Switzerland. The Explore model favors Malaysia, Philippines, Poland, Sweden, and Taiwan.
During March, global stocks outperformed U.S. bonds by more than 225 ba sis points. The Global Allocation model's equity weighting remains above benchmark allocation. The model has an above benchmark weighting for the U.S. and Japan, while holding underweight al locations for Emerging Markets, Pacific ex. Japan, Canada, Europe ex. U.K., and the U.K.
During March, global stocks outperformed global bonds by more than 260 ba sis points. The model's equity allocation remains above benchmark weighting, with U.S. Large-Caps and U.S. Growth each receiving more than 20% allocation. The largest fixed income allocations were Emerging Market bonds and U.S. High Yield, both with more than 5% weights.
The Fixed Income Risk Management model improved during the month and entered April with a fully invested allocation to fixed income sectors. The Fixed Income Allocation model continued to favor risk-on leadership and did not rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Bloomberg Barclays U.S. Aggre gate Bond Total Return Index rebounded in March and breadth improved. The Fixed Income Allocation model continued to favor risk-on leadership and did not rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Catastrophic Stop model improved during the month and entered April with a fully invested equity allocation recommendation. Financials, Information Technology, Consumer Discretionary, and Utilities are overweight. Real Estate, Communication Services, Energy, Materials, Industrials, and Consumer Staples are underweight.
Breadth remains bullish with 10 of the 11 S&P 500 sectors posting positive price gains in March. Financials, Information Technology, and Health Care are overweight. Real Estate, Communication Services, Materials, and Consumer Staples are underweight.
The Fab Five Tape Composite remains bullish. We examine four indicators in the Tape Composite that could be next to turn negative. Even if all four weaken, the Fab Five Tape would only fall to neutral, so more deterioration would be needed to turn the model bearish.
Biggest rise in aggregate hours since January 2023. But AHE eases to 4.1% y/y, the slowest pace since the recovery began. Household employment expands by nearly 500,000, as part-time participation increases. A June rate cut is still in play.
The global economy finished the first quarter of the year on a strong note, according to the latest global PMIs. Growth continued to broaden among sectors and economies, supporting the current bull market in equities. With the strong expansion has come inflation that has struggled to come down measurably due to stickiness in services prices.
Three weeks ago, we highlighted the re-emergence of physical (natural resource) over digital (technology) themes. We continue to believe physical themes stand to benefit from "higher for longer" or "cuts fuel inflation" scenarios - but some may first need to work off some froth.
The pandemic brought a rebalance of wealth on a nominal basis to lower-income groups. Despite recent normalization, most U.S. households are still in a solid position based on savings and real wage growth, with notable strength of the middle class. Income and spending are still skewed to the wealthy.
Despite a pickup in the latest week, jobless claims remain low, as labor demand is still strong. Trade deficit widens and is projected to weigh on Q1 GDP growth. Mortgage applications slip in the latest week.
Bullish on gold with maximum overweight exposure to equities, underweight allocation to bonds and cash. Contrast to two years ago, when cash was king. Gold and equity uptrends would be threatened by yield uptrend and excessive speculation.
Markets have stumbled but liquidity drain hasn't caused a serious problem thus far. There is enough in the RRP to absorb ongoing QT and excess tax payments. If stocks and credit can continue to weather the liquidity storm over the next couple of weeks, look for further gains.
Volatility ETFs, option ETFs, and 0DTE options have some similarities to early 2018, but nuances differ. Low downside volatility, the VIX, and excessive optimism suggest the market is vulnerable to a volatility surge. Whether any vol spikes turn into a prolonged downtrend will likely depend on the Fed's reaction and macro conditions.
The NDR Commodity Model moved to its most bullish reading since September 2021. Trend and breadth improvement provide additional evidence for bulls. However, and short-term technical indicators may signal a pause to the rally is warranted.
Services PMIs show continued, but slower, growth. Inflation indicators mixed. ADP payrolls and compensation growth accelerate, a sign the labor market remains tight. State coincident indexes show broad-based expansion. Light vehicle sales edge down in March, but trend growth strengthens.
Breadth deteriorated slightly with 19 of 48 themes (40%) outperforming in March versus 23 of 48 in February. What's not to like about positive economic surprises and Fed rate cuts? Higher rates and inflation. More commodity-related than tech-related themes are outperforming as rates rise and inflation concerns grow.
The S&P 500 gained 3.1% in March, with all sectors finishing with positive returns for the second-straight month. Sector leadership was Value over Growth during the month. The sector model upgraded Financials to overweight, and we have the sector on watch for an upgrade.
Valuations continue to worsen. Shorter-term sentiment is excessively optimistic. Consumer Confidence is less optimistic, but increasing optimism toward stocks.
Job openings per unemployed come down slightly, reflecting some easing in labor market tightness. Factory orders rebound more than expected.
Broad based indicators continue to support a constructive outlook for European equities. However, rising prices imply a higher bar for earnings, representing potential downside risk should earnings miss forecasts. We highlight a series of technical indicators to watch to gauge bear market risk.
The S&P 500 is off to its best start since 2019 and 14th-best since 1926. Growth and related sectors outperformed, but Value and small-caps rebounded late. Bonds were the only major asset class to decline in Q1.
The top-level equity allocation stayed at 86%. Both technical and macro indicators continue to be positive on equities. U.S. Large Caps, U.S. Growth, U.S. Value, and International Developed hold the largest allocations.
ISM Manufacturing PMI jumps into growth territory. Cost pressures pick up. Core PCE inflation still sticky, amid strong consumer demand. Construction spending declines, led by the public sector.
The result of restrictive monetary policy can be seen through five examples. Historically, the Fed has waited a median of 7.5 months from the last rate hike to the first rate cut. We worry about inflation moving from supply side improvements to demand side risks.
The S&P 500 has risen for five straight months through March for the thirteenth time on record. The S&P 500 is above its 200-day moving average by the most since May 2021. The market is approaching overbought levels consistent with a pullback, but momentum and our models suggest the long-term trend remains bullish.
Fridays have historically been a good day for the market and the two most recent quarters have been exceptional.
Momentum factors have performed much better in 2024, as 2023 leadership trends have mostly persisted. Momentum has generally performed well across all sectors, even within underperforming sectors. Our factor performance reports suggest that Growth sector leadership could be challenged if earnings and guidance falter.
Q4 real GDP growth revised up. Strong momentum supports continued expansion into 2024. Jobless claims remain low, reflecting robust labor demand. Consumer sentiment rises to highest level since July 2021, a positive for consumer spending growth ahead. But regional manufacturing activity worsens.
Yen recovery would test Japanese market's outperformance. Watching influence of rate differentials on yen. Also watching sentiment, Japan Composite and Japan Rally Watch.
Most indicators of financial conditions have eased over the past year. Fed rate cuts should further loosen conditions. This has been supportive of stock prices and economic growth, but makes further disinflation more difficult. It raises the possibility of fewer or later rate cuts than currently expected, and a risk of market repricing.
Recent developments show major DM central banks moving toward rate cuts. Japan remains the exception. Further normalization is expected. Contemplating further reductions in Japanese exposure.
The current strong growth/low inflation environment is bullish for stocks, especially large-caps and Growth. Overheating would favor large-caps and Value. A downshift to low growth/low inflation would favor small-caps and Value, but recession would favor Growth.
Economic growth broadens in Q4 2023 and early 2024. Recession Probability Model drops sharply. Mortgage applications remain low, amid still high mortgage rates.
Environmental Services, perhaps best known for garbage collection, is the best performing theme not influenced by Bitcoin, since the end of January.
We discuss the most notable changes in monetary policy over the past week. Global net tightening has fallen to a two year low and will likely enter equity sweet spot in mid- 2024. Emerging markets easing faster than developed economies.
Valuation metrics have indicated worsening valuation as the secular bull has continued but not near previous extremes. U.S. earnings yield is below bond yield but spread is positive using global medians. Relative valuations are less threatening than in 2000. Ratios trending higher with secular uptrend but still below 2021 highs and levels consistent with extreme optimism.
Consumer confidence remains range-bound, on worries about inflation and the economic outlook. Existing home prices mixed at the start of the year. Durable goods orders pick up, but y/y change points to subdued factory output growth. Richmond Fed regional activity continues to contract.
We continue to see a case for European small-caps but our conviction is being tested by a bearish relative strength trend. While we see improving consumer confidence as positive for smaller U.K. Consumer Discretionary stocks, fundamental and technical indicators are less constructive. An improvement in intermediate breadth would support a more bullish view on smaller U.K. Consumer Discretionary stocks.
There are plenty of reasons for the Fed to cut rates three times starting in June. But the market has repriced for that. There is too much complacency with data so close to the Fed's targets for 2024. Data dependency means data surprises have outsized impacts on asset prices.
New home sales edge down in February. Prices decline. CFNAI rebounds, but its three-month average remains consistent with subdued growth. Texas manufacturing conditions worsen.
The secular trend, which turned upward in 2009, still seems intact, but two indicators argue the trend is getting a little mature. The cyclical trend, which turned upward in 2022, also seems intact despite some divergences and extreme leadership concentration. The trend has been persistent and with decent breadth. The short-term trend is extended and subject to correction but is unlikely to be a major correction.
As part of the "Fed is now decidedly dovish" rally on March 20, the FT Nasdaq Cybersecurity ETF (CIBR) had a breadth thrust where the ratio of advancing/declining (A/D) CIBR members exceeded 25.
Markets are vulnerable to a correction, as liquidity is drained from the banking system. Continued QT and tax payments could leave the market short of cash. Four non-macro factors also warn of a possible correction.
Manufacturing PMI reaches highest level in 22 months. Inflation pressures pick up. Philly Fed factory activity expands for the second consecutive month. Expectations soar. LEI posts its first gain in two years. No longer signals recession ahead. Existing home sales jump. Jobless claims remain low.
The latest economic data from China remains constructive, led by industrial activity. This confirms our view that China poses limited downside risk to the global economy this year. However, growth likely won't overshoot due to property woes, which may not provide much impetus to China's equities or commodities.
After underperforming for most of the last year, both Energy and Materials have begun to trend higher vs. the S&P 500. The NDR Commodity Model and Crude Futures Technical Model each turned bullish in February. Energy and Materials have seen rising intra-month sector model composite scores in March and will likely both be upgraded to marketweight by the model.
Optimism excessive with fading seasonal and cyclical tailwinds. Watch breadth, leadership, concentration and the Stock/Bond Composite for signs that a downturn is underway. As long as rate cuts remain a high probability, the cyclical bull should persist. A correction would relieve the optimism and set the stage for the bull market to resume.
Fed still expects three rate cuts this year. But policy in terms of real rates to remain restrictive through 2025. Economy and labor market moving into better balance. Inflation still too high. Fed to proceed carefully. Decision on QT pace likely in May.
Q4 2023 earnings season keeps the 2024 earnings acceleration theme on track. Earnings growth is expected to be weakest in small-cap Value. 2H estimates and interest rates are two risks to EPS acceleration.
We have noticed more investor interest in CPI-sensitive themes, mainly commodity and construction-related, over the past month and since the October 2023 market low. While a reflation scenario was not in our 2024 outlook, we can shift theme overweights to be in position for rising CPI and inflation expectations if warranted.
ABI trend points to an improvement in nonresidential construction spending in late 2024. Mortgage applications edge down.
Measures of market volatility across and within asset classes are lower than they were a year ago. VIX seasonality and four-year cycle confirm the S&P 500 cycle composite for elevated volatility leading into November. Low volatility can be persistent however evidence of an overly complacent market continues to mount.
Both housing starts and permits increase in February. Near-term trends support continued economic expansion.
Wage gains in Japan fueling policy change expectations. BoJ to keep YCC for now. No major changes to the dot plot, as economy comes back into better balance. Policymakers pay more attention to anecdotal evidence than economists do.
HMI rises above 50 for the first time since July 2023. Points to stronger homebuilding activity this spring.
The Leading Indicator Model for stocks is currently bullish. Many technical indicators remain in uptrends with a few concerns. The cycle composite is showing a positive 2024 with corrections in May and September-October.
Manufacturing and mining output rebound. Gains broadens across industry groups, a positive sign for future growth. But factory activity in the Empire region slumps more than expected in March. Consumer sentiment softens slightly. Import prices rise, in line with expectations.
This week saw the third hotter-than-expected CPI report in as many months. A physical over digital theme could play out in both "higher-for-longer" and "rate-cuts fuel inflation" scenarios.
Household debt as a percentage of GDP remains in a post-pandemic downtrend. Corporate debt as a percentage of GDP is back below pre-pandemic levels. Federal deficits and debt continue to grow with interest payments rising.
Retail sales rebound from January slump, but three-month average dips. Suggests slower consumer spending in Q1. PPI inflation picks up, led be energy. Underlying pressures also firm up, implying an upside risk to consumer prices. Jobless claims show the labor market remains tight. Business inventories flat.
Seven sectors are within 5% of record highs, the most since January 2022. Breadth has been strong, led by cyclical sectors. Mega-cap trends can override breadth trends in the most concentrated sectors.
Gold records have not produced excessive optimism. Gold outlook supported by declining bond yields, weakening U.S. dollar and bullish gold models. Gold's cyclical bull gain still less than the median for a secular bull.
Profitable banks plummeted to a record low on DIF replenishment, goodwill impairment, litigation, reorganizations, loan loss provisions, and lower noninterest income. Worst efficiency ratio since the GFC. Credit card delinquencies and charge-offs slowed. CRE workouts just starting.
Volume demand and supply has been a helpful tool in a market driven by ETFs, algos, and pods. We introduce volume demand and supply indicators for Growth versus Value and small-caps versus large-caps. Demand and supply spreads favor Growth and large-caps currently.
Despite a near-term pullback on weak Palo Alto Networks guidance, Cybersecurity offers great potential with an expected long-term CAGR over 11%. The need for increased security around U.S. Presidential and other country elections creates a near-term catalyst for Cybersecurity. If near-term catalysts and long-term growth opportunities prove to be correct, this could be a buying opportunity for Cybersecurity. However, we recommend waiting for the relative strength uptrend to resume.
The fiscal/monetary policy mix matters more for the economy and markets than either policy branch alone. When both are easing, it could be a powerful boost to the economy. When growth is already above potential, as it is now, it could also be inflationary. The Fed should not be in a hurry to cut rates.
Female participation in the prime age labor force has soared all over the world, outpacing that of males. In the U.S., there's has been a notable surge in participation among Millennial women, who spend more and differently than their male counterparts. The rise in Millennial female participation should have positive implications for the economy and equities in the long-term.
The median P/E of the top 10 stocks is 14.3 points higher than the other 490 in the S&P 500. The top 10's P/E is 2.6 standard deviations above its long-term mean, but the other 490's P/E is 1.8 standard deviations above. Interest rates may determine how relevant valuations are in 2024.
CPI inflation came in slightly higher than expected in February, led by shelter, energy, and transportation services. Underlying price pressures remained sticky, with core and super-core inflation barely easing. Although markets still expect a Fed rate cut in June, the risk is of later or fewer cuts than currently priced in, if inflation pressures persist.
The strong performance of GRANOLAS has helped increase European market concentration above the highs of the dotcom bubble. However, high market concentration does not necessarily mean that European equities are heading into a bear market. And while the largest European stocks are highly rated, we are far from the valuation extremes seen at the peak of the dotcom bubble.
After years of minimal attention, NDR is returning to covering commodities. We see value in commodities along traditional finance lines like diversification and hedging. But we also see unique opportunities created by energy transition, capital discipline by mineral producers, and shifting trade alliances.
In our journey to lower yields due to a Fed easing cycle, there are short-term risks to the outlook. We identify five of them. Two are technical. But the other three are fundamental, including policy and inflation.
Three of four stock market indicators are rated bullish by the model. All three interest rate indicators are bullish. Rising crude prices could be a negative for equities.
Solid payroll gains and slower wage growth in February. The unemployment rate, however, jumps to a two-year high. This shows easing labor market tightness. But the big gap between surveys adds uncertainty about the economic outlook. This report should keep the Fed on track for a rate cut in Q2, most likely in June.
Bitcoin is now retesting its 2021 high near $67k, as we expected. However, AUM in spot Bitcoin ETFs exceeded $50B faster than we expected and we have reached our price target faster than expected.
While it's still highly likely that the Fed will cut this year, a long pause is not off the table given that economic and inflation data has been surprising to the upside. Long pauses have no definitive destiny on equities, with the current cycle following the more bullish cases. If the Fed cuts and quickly moves back to tightening, that could have negative implications for equities.
Despite an increase in layoff announcements, initial jobless claims remain low. Revisions confirm the pickup in nonfarm productivity last year. Trade deficit widens at the start of 2024, although trade with China continues to shrink. Continued deflation in wholesale used vehicle prices points to falling CPI for used cars and trucks.
Record highs reached by rising numbers of markets and sectors, accounting for majority of ACWI market cap. Optimism has gotten more extreme as new highs have increased, making a correction more likely. Japan's highs providing cyclical and secular confirmation, but yen strength would be a threat.
Focus on mega-cap tech's attribution to returns misses that most stocks are in uptrends. Complacency toward Tech Titans' EPS and NDR sentiment composites imply elevated risks of a pullback. NDR's models suggest the intermediate-term outlook is bullish.
Reducing Japan to 5% from 10%, remaining at underweight. Shifting to overweight U.S., Europe. Increasing U.S. to an overweight 58% from a marketweight 55%. Increasing Europe to an overweight 30% from a marketweight 28%. Policy normalization in Japan and rate cuts everywhere else prompt change.
New tools for Asia-Pacific market analysis include a Realized Volatility Report. Asia Pacific and China display excessive complacency. Four additional sentiment reports contribute to an aggregate score, offering a broad perspective on the region.
Private sector job growth accelerates in February, led by services and construction. JOLTS data shows labor market remains out of balance. Mortgage applications jump.
Breadth improved in February with 23 of 48 themes outperforming versus only seven in January. We saw stunning moves of 40% or more for several companies within Bitcoin, Genomics, AI and E-commerce themes. We continue to favor Tech/AI and Demographic themes while avoiding Global Shock/Environmental themes. We upgraded Millennial Spending and downgraded Uranium themes in February.
Price/earnings ratios are rising with the market rally. Price/sales rising above pre-pandemic levels. Short-term sentiment is showing more optimism.
The S&P 500 jumped 5.2% in February, with all sectors registering gains during the month. Leadership remained decidedly cyclical over defensive. The sector model continues to favor cyclical sectors. Within the cyclical group, the model favors Growth sectors over Value sectors.
The global economy continued to accelerate in February, according to the latest PMIs. Leading indicators and broadening trends among sectors and economies support the solid recovery and the current bull market in equities. The path toward disinflation has gotten tougher, which may keep central banks tighter for longer.
Services PMI shows continued but slower growth. Cost pressures ease. Light vehicle sales bounce back, but trend remains subdued. Factory orders decline more than expected.
The All-Country World ex.-U.S. Total Return Index gained over 250 basis points in February. The International Equity Core model is overweight Canada, China, Japan, and Germany, while underweighting the U.K., Australia, France, and Switzerland. The Explore model favors Brazil, Mexico, Spain, Turkey, and the Philippines.
The Catastrophic Stop model entered March fully invested. The International Equity Core model is overweight Canada, China, Japan, and Germany, while underweighting the U.K., Australia, France, and Switzerland. The Explore model favors Brazil, Mexico, Spain, Turkey, and the Philippines.
During February, global stocks outperformed U.S. bonds by more than 500 basis points. The Global Allocation model's equity weighting remains above benchmark allocation. The model has an above benchmark weighting for the U.S., while holding underweight allocations for Japan, Emerging Markets, Pacific ex. Japan, Canada, Europe ex. U.K., and the U.K.
During February, global stocks outperformed global bonds by more than 500 ba sis points. The model's equity allocation remains above benchmark weighting, with U.S. Large-Caps and U.S. Growth each receiving more than 20% allocation. The largest fixed income allocations were Emerging Market bonds and U.S. High Yield, both with more than 5% weights.
The Fixed Income Risk Management model improved during the month and entered March with a fully invested allocation to fixed income sectors. The Fixed Income Allocation model continued to favor risk-on leadership but did not rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Bloomberg Barclays U.S. Aggre gate Bond Total Return Index was down -1.4% in February and breadth weakened. The Fixed Income Allocation model continued to favor risk-on leadership but did not rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Catastrophic Stop model improved during the month and entered March with a fully invested equity allocation recommendation. Consumer Discretionary, Industrials, and Health Care joined Financials and Technology at overweight. Utilities improved to marketweight. Energy and Communication Services deteriorated and joined Materials, Real Estate, and Consumer Staples at underweight.
Breadth improved with all 11 S&P 500 sectors posting positive price gains in February. Consumer Discretionary, Industrials, and Health Care joined Financials and Technology at overweight. Utilities improved to marketweight. Energy and Communication Services deteriorated and joined Materials, Real Estate, and Consumer Staples at underweight.
A first new all-time high has not always been auspicious for European equity returns, but a series of all-time highs has been more bullish. We also focus on German equities and find a positive absolute case, but a more ambiguous relative case. A break-out in the German relative strength line and improving business confidence would suggest better prospects on a relative basis.
Bond market has mostly unwound the upside surprise in CPI. Market doesn't seem too concerned about inflation. But the bond market isn't always right, with a warning signal from the NDR Commodity Model. The real rate curve has uninverted implying no recession on the horizon.
The NDR Commodity Model improved to its most bullish reading since August 2023. The external (macroeconomic) model composite improved to its best reading since September 2021. Strong model readings and improving breadth tilt the weight of the evidence in favor of the bulls. However, sentiment returning to excessive optimism could keep a strong rally in check.
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