Economic Insights - June 2018

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Have you ever noticed that the “hot topic” people are talking about is seldom the thing that makes a big difference? For instance, inflation was the number one issue that analysts and money managers were concerned about as we entered in to 2018 was inflation. And that what people are acting on. According to Urban Carmel:
“79 percent of fund managers expect higher inflation over the next 12 months; this is near a 14-year high. Commodity allocations are at a six-year high. In the past, this has corresponded with a fall in U.S. 10-year yields in the months ahead.”

But as Business Briefings noted back at the beginning of 2018, “It’s not wise to load up on these inflation-assisted groups now.” And in fact, reports on PPI, CPI and PCE have pulled back and softened lately. We won’t try to predict what may happen to the commodity picture down the road, but we can say that it is now looking like a crowded trade with a lot of folks on one side of the boat.

For that reason, the second half of the year may be interesting. Fund managers entered the year very bullish and that sentiment resulted in a January spurt in the indexes that brought on an overbought situation not seen in quite some time. During that period, cash levels were at four-year lows. Allocations to global equities had risen to the highest level in nearly three years and bond allocations were at a four-year low and money manager preferred eurozone equities over their U.S. counterparts. A chart in this month’s printable PDF issue, shows where we stood.

The truth was unmistakable: Everyone was on one side of the boat on multiple fronts, and here is what happened. The stock market corrected and is now in the midst of a four-month consolidation phase that is working off the excesses created in that buying frenzy. During this time, global equity allocations have fallen, and cash balances have risen. Investors are no longer at a bullish extreme. In the past nine months, U.S. equities have outperformed Europe by 6 percent and the rest the world by 5 percent. But, despite this, fund managers continue to be underweight on the U.S.

At some point, the out of balance situation regarding U.S. stocks will swing back to a more neutral stance....

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