Picture3-150x150US monetary policy is the major driver of the global cost of capital. As a Fed rate cycle approaches, we see the effects of raising required returns across the globe. The increased volatility is a reflection of investors’ changing return requirements, risk assessments and the associated unwinding of leveraged exposure. As we approach the anticipated Fed rate hike, look for he earnings yield in stocks to rise (PE’s to drop) setting us up for an initial risk of a drop in equity prices on the magnitude of 10-25%. But watch for an eventual rise in underlying earnings which will overcome the multiple compression and lead to new highs. On the bond side beware that a one year rise in the 10yr yields to 3.25% would equate about a 7% loss in 10 yr bond positions. As for commodities, supply, the strength of the dollar and the unwinding of leveraged carry trades would seem to be the factors leading to the continued bear market. Expect the trend to continue and remain underweight.

 

Key Macro Drivers:

Global Economy
  • Trade and manufacturing are middling to sluggish
  • Services and household confidence/spending are firmer
Inflation/Deflation
  • Inflation expectations are retreating with oil and other commodities
  • Lower oil and commodity prices is a positive for the worlds major economies, the late 1990’s is a recent example
Key Risks
  • Chinese equity slide – Not likely to affect Chinese economy
  • Greece – Off the radar but not solved
  • Sluggish global trade – Rising US import volumes a good sign
  • **Rising interest rates in the US and high levels of debt globally

 

Our strategic macro economic research partner released this month’s asset allocation recommendations with a 6-12 month time horizon.

 

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For information on Alhambra Investment Partners’ money management services and global portfolio approach, Douglas R. Terry, CFA is reachable at: dterry@4kb.d43.myftpupload.com

This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Investments involve risk and you can lose money. Past investing and economic performance is not indicative of future performance. Alhambra Investment Partners, LLC expressly disclaims all liability in respect to actions taken based on all of the information in this writing. If an investor does not understand the risks associated with certain securities, he/she should seek the advice of an independent adviser.