27 August 2014

Macro Strategy Update

A One-Handed Economist

Executive Summary: The signs supporting the US economic recovery are much clearer, with the outperformance in cyclical sectors, return of consumer confidence and retail, and the recovery of the high yield market. We continue to remain positive on the US and the US stock market, at least until the end of 2014.

Portfolio Positions: There has been no change to our positions. Our asset allocation remains neutral from a risk perspective, with a continued overweight to developed markets especially the US.


Former US President Harry Truman was famously quoted asking for a one-handed economist after being fed up with his economic advisers saying “On the one hand, this” but “On the other hand, that”. Many economists are famous for taking a vague position when commentating on the market and the economy, to cover all angles and trying not to appear too wrong. Whilst we too could be faulted for sitting on the economic fence at times, we have to take a measured approach and consider all factors before making a call on the market. In this instance however, we reiterate our continued confidence in the US markets, as there are real signs that the economic recovery is clear.

Cyclicals Outperforming
Since the recent sell-down in markets which we called a technical correction, economic sensitive sectors (highlighted in blue) have been outperforming the market and the other defensive sectors. This shows that investors are willing to pay for growth and are more confident about the stock market (Fig 1). Comparing the performance of growth stocks relative to value stocks gives us an indication of this and the uptrend remains intact (Fig 2).

Fig 1. S&P 500 Sector % Increase Since 7 Aug 2014

Image courtesy of Stockcharts.com

Fig 2. The Outperformance of Growth Versus Value Remains Intact

Better Retail, Less Misery
Retailers surpassed earnings estimates during the recent earnings season, which led the recovery in retail stocks. We have been quite concerned about the relative weakness in retail stocks and the consumer in general as it is one of the main drivers of the economy. The recent uptick gives us some comfort that the US consumer is not spent out (Fig 3). In addition, the misery index continues its downward trajectory after spiking up during the last financial crisis (Fig 4).

Image courtesy of Stockcharts.com

Fig 3. On A Relative Basis, Retailers Are Making A Comeback

Fig 4. The Misery Index, Whilst Not At All Time Lows Continues To Get Better

High Yield Performance
Finally, the fixed income market confirms the positive signals coming out of the equity market. High yield bonds have staged a decent recovery versus risk-free Treasury bonds after the recent sell-off (Fig 5). The high yield market is driven primarily by economic growth and the business cycle and confidence in these companies able to make interest payments on their debt is a sign that the economy is positive. All these signals lead us to conclude that the bull market in equities remains sustainable.

Image courtesy of Stockcharts.com

Fig 5. High Yield Bonds Outperforming Treasuries

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