Goldman Sachs - economic report_watermark
.pdfvk.com/id446425943
vk.com/id446425943
Negative territory
Negative yielding sovereign debt, $ tn
7 |
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EUR |
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6 |
JPY |
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1 |
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0 |
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2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Germany: Yielding below Japan
German and Japanese yield curves, %
0.6 |
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0.4 |
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0.2 |
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0.0 |
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-0.2 |
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-0.4 |
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-0.6 |
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DEM |
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JPY |
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-0.8 |
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-1.0 |
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com/id446425943 |
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vk.com/id446425943
vk.com/id446425943
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Stock prices have risen alongside falling interest rates… |
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…and the yield gap currently equals 380bp |
3000 |
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3.4 |
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S&P 500 |
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3.2 |
2800 |
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(lhs) |
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3.0 |
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2.8 |
2600 |
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2.6 |
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2.4 |
2400 |
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2.2 |
2200 |
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10-year |
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2.0 |
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US Treasury yield |
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1.8 |
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(rhs) |
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2000 |
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1.6 |
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1.4 |
1800 |
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1.2 |
2016 |
2017 |
2018 |
2019 |
2020 |
20 % |
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18 % |
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16 % |
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14 % |
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12 % |
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S&P 500 |
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10 % |
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earnings yield |
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8 % |
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6 % |
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4 % |
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2 % |
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US 10-year |
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Treasury yield |
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0 % |
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1976 |
1982 |
1988 |
1994 |
2000 |
2006 |
2012 |
2018 |
Cyclicals vs. defensives are pricing US growth of ~1.5%... |
…and policy uncertainty has weighed on equity valuations |
110 |
Cyclical vs. defensive |
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5.0% |
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US equity industry groups |
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4.5% |
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105 |
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(lhs) |
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4.0% |
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100 |
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3.5% |
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3.0% |
95 |
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2.5% |
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2.0% |
90 |
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1.5% |
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US Current |
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85 |
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Activity Indicator |
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1.0% |
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(rhs) |
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0.5% |
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80 |
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0.0% |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
1000 bp |
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250 |
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900 bp |
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800 bp |
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200 |
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700 bp |
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600 bp |
S&P 500 yield gap |
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vs. 10-year US |
150 |
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500 bp |
Treasury |
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400 bp |
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300 bp |
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100 |
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200 bp |
Economic policy |
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100 bp |
uncertainty index |
50 |
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(3m avg, rhs) |
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0 bp |
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(100)bp |
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0 |
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2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 |
The S&P 500 appears to be trading near fair value...
800 bp |
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The current yield |
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gap is in line with |
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700 bp |
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model-implied |
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levels, and we see |
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600 bp |
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it widening slightly |
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by year-end |
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500 bp |
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400 bp |
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300 bp |
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Modeled |
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200 bp |
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Actual |
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100 bp |
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R2 = .69 |
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0 bp |
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(100)bp |
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2002 |
2005 |
2008 |
2011 |
2014 |
2017 |
2020 |
…and we see the index moving largely sideways through year-end
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2020 adjusted EPS |
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$175 |
$178 |
$181 |
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$184 |
$187 |
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yield)UST |
525 bp |
2500 |
2525 |
2575 |
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2625 |
2675 |
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gapYield 10Y-yieldEPS |
475 bp |
2675 |
2725 |
2775 |
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2825 |
2875 |
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GS forecast: |
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425 bp |
2900 |
2950 |
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3000 |
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3050 |
3100 |
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Current |
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500 |
375 bp |
3175 |
3225 |
3275 |
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3350 |
3400 |
yield |
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gap |
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(S&P |
325 bp |
3500 |
3550 |
3600 |
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3675 |
3725 |
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GS EPS |
Cons. EPS |
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est. |
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est. |
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vk.com/id446425943
Looking stretched
Historical percentile ranks*
MSCI EM PE |
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IG OAS |
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S&P 500 PE |
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HY OAS |
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Post-crisis history |
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EMBI OAS |
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Full history: 1997-present |
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0% |
25% |
50% |
75% |
100% |
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Cheap |
Expensive |
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Risk up, bonds down
Global beta index*; US 10-year Treasury yield, % (rhs)
150
145
140
135
130
125
120
115
110
105
100
95
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Global beta index (Cross-asset long only performance) 0.5 US 10-year yield (RHS)
90 |
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0.0 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
vk.com/id446425943
Defensive flavor
Cum. excess returns on a monthly rebalanced long-short strategy of broad HY vs. CCC-rated bonds, %; HY cum. excess returns, % (rhs)
14% |
Long-short HY vs. CCC cumulative |
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58% |
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excess returns, vol-neutral |
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12% |
HY Cumulative excess returns (RHS) |
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48% |
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10% |
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8% |
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38% |
Quality outperforms |
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6% |
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28% |
4% |
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18% |
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2% |
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0% |
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8% |
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-2% |
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-2% |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Performing at full-employment
Performance of long strong vs. weak balance sheet stocks before and after US unemployment dips below 4.5%
60% |
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1998 |
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2006 |
2017 |
60% |
50% |
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50% |
40% |
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Quality |
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40% |
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30% |
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outperforms |
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30% |
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20% |
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20% |
10% |
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10% |
0% |
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0% |
-10% |
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-10% |
-20% |
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-20% |
-12-10 -8 |
-6 |
-4 |
-2 0 |
2 |
4 6 8 10 12 14 16 18 20 22 24 |
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vk.com/id446425943
vk.com/id446425943
60/40 equity/bond portfolios had their best 1H in decades…
24% |
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60/40 portfolio YTD Return |
3.6 |
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20% |
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Sharpe Ratio (RHS) |
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3.0 |
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16% |
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2.4 |
12% |
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1.8 |
8% |
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1.2 |
4% |
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0.6 |
0% |
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0.0 |
-4% |
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-0.6 |
-8% |
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-1.2 |
63 |
71 |
79 |
87 |
95 |
03 |
11 |
19 |
… but investors have also increased allocations to “safe” assets
2.0 |
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1.5 |
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1.0 |
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0.5 |
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0.0 |
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-0.5 |
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-1.0 |
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-1.5 |
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Risky assets |
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-2.0 |
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Safe assets |
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Risk appetite indicator |
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-2.5 |
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-3.0 |
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16 |
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18 |
19 |
Equity fund flows have been as negative as during the GFC…
250 |
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200 |
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Money |
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150 |
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Market |
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100 |
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Govt |
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50 |
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Credit |
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0 |
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-50 |
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-100 |
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Equity |
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-150 |
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-200 |
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07 |
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…while low-vol stocks have performed particularly strongly
40% |
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30% |
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20% |
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10% |
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0% |
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-10% |
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-20% |
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-30% |
S&P 500 low vol index |
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-40% |
S&P 500 low vol index vs. S&P 500 |
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91 |
95 |
99 |
03 |
07 |
11 |
15 |
19 |
Monetary policy has been the main driver of risk appetite… |
…but better growth is likely needed to sustain the current rally |
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10 |
TINA |
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Reflation Goldilocks |
Growth |
Fed |
14 |
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PC1: Global growth |
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6.5 |
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8 |
PC1: Global growth |
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slowdown dovish |
12 |
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Global CAI (RHS) |
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6.0 |
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pivot |
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PC2: Monetary |
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6 |
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10 |
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5.5 |
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policy |
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8 |
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4 |
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6 |
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5.0 |
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2 |
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4 |
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4.5 |
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0 |
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2 |
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4.0 |
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-2 |
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0 |
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-2 |
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3.5 |
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-4 |
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-4 |
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3.0 |
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-6 |
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-6 |
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2.5 |
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-8 |
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-8 |
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2.0 |
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-10 |
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-10 |
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-12 |
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1.5 |
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-12 |
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-14 |
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1.0 |
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14 |
15 |
16 |
17 |
18 |
19 |
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07 |
09 |
11 |
13 |
15 |
17 |
19 |
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com/id446425943.vk
The CAPE uses a 10-year average of real S&P 500 reported earnings per share.
We define the start of a rate-hike cycle as the first hike after the policy rate has plateaued or been cut, using the discount rate from 1955-1971 and the federal funds rate thereafter. A rate-hike cycle ends either when the subsequent Fed move is a cut or when the policy rate is stable for the subsequent 12 months. We define a rate-hike cycle
as lasting more than one month and including more than one hike.