February 3, 2017

Make America Inflate Again

 

Highlights:

  • January turned out to be a reversal on what worked in the 4th quarter of 2016. Large cap growth and momentum styles dominated U.S. equity performance while ex-U.S. markets outperformed the U.S. on the back of a weakening U.S. dollar.
  • Fixed income was flat as Treasury yields fell from intramonth highs on more muted expectations of policies coming out of the new administration.
  • Precious metals also reversed their 2016 poor performance reflecting the heightened macro uncertainty surrounding the executive orders pushed through by the new administration.
  • Make America Inflate Again? The tectonic forces of cyclical reflation and secular disinflation are running up against one another and the fulcrum appears to be the long-term break-even rates between nominal Treasury yields versus TIPs currently at 2%.
  • The upshot of positioning in this new regime: get more of your cyclical risk in equities and less of it in fixed income.

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