1. The U.S. labor market continues to power on, with an unemployment rate now below 4%. Jobs continue to grow despite the economy being close to full employment.
2. The private sector (households and corporations) have deleveraged and debt levels remain low. As a result, consumers and corporations should be relatively more resilient to credit stresses relative to prior economic cycles.
3. Inflation remains below long-term levels. One factor that could increase inflation estimates is an escalation in the trade war, which could cause higher tariffs and increased pricing pressure.
4. After years of decline, China’s money supply is on the rise. China lowered the required reserve ratio for banks after the negative effects of tariffs began weighing on the economy.
5. The market is pricing in one additional rate hike for 2019 (for a total of three), as compared to pricing in two total hikes as of August 2018. The yield curve has flattened in response to the continued Fed hikes (not shown).
6. The recent increase in bond yields was led by an increase in real interest rates, which is representative of expectation of future Fed policy, rather than a rise in inflation expectations. For a sustained rise in yields, inflation expectations need to move higher.
7. Corporate bonds yields are the most attractive they’ve been since 2009, especially among shorter maturities.
8. Despite macro headwinds, we expect strong fundamentals to support equities in Q4. Earnings remain a tailwind, aided by U.S. GDP growth expectations above 4% and added stimulus in China.
9. Strong growth and earnings trends, and trade concerns have contributed to U.S. outperformance. U.S. valuations have risen in tandem, making the risk/reward for international diversification more attractive.
This article was written by the team at Sage Advisory, a participant in the ETF Strategist Channel.