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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

09.01.2023

Earnings Season

Q4 earnings season starts this week and analysts have been cutting estimates. FactSet show that over the last 3 months, consensus expectations for Q4 have fallen 6.5%.

It's normal for analysts to cut numbers ahead of time - it lowers the bar, making beats easier to achieve - but the reductions over Q3 and Q4 2022 were larger than normal.

Interestingly, recession fears have been increasingly priced into earnings estimates at a time when Now-Casting shows US GDP growth tracking around 2.0% annualised.

From a macro perspective, one of history's most anticipated recessions still isn't apparent in the hard data.

Marrying top down and bottom up analysis is never easy. Fortunately, Qi can at least let investors know when each skill set is required.

05.01.2023

Tactical Trading

Model confidence is high on Qi's Short Term models, underpinning the importance of tactical trading in January. Don't get suckered into early year consensus views.

Macro matters and there's little valuation edge currently. 2023 is shaping up to be all about macro, again! And, thus far, US equity indices are behaving as they should.

Watching ST model value moves will be critical.

03.01.2023

The best European recession trade?

Looking across Qi, one of the biggest moves in model over year-end came in European Fixed Income. Model value for the European 2s10s yield curve flattened aggressively and now sits at -60bp. That’s versus -31bp one month ago.

The actual market did not follow suit to the same degree; hence a large Fair Value Gap has opened up. On Qi, 2s10s sits 30bp too steep relative to prevailing macro conditions. That’s an extreme.

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23.12.2022

How to measure the BoJ policy shock

While there are some mitigations - dovish language, increased JGB purchases - this week's BoJ shift in policy stance was unambiguously hawkish. Any actual changes may be a slow burn, but the shift in intent was one of the biggest Central Bank pivots seen in a long time.

That much is evident from the market's reaction.

The chart below shows our Credit Impulse data for US, Europe, UK and Japan. It's effectively a Financial Conditions Index, all be it one that focuses on credit and liquidity, but does not include equities so has no wealth effect.

We refreshed most recently just prior to the December FOMC to show how US financial conditions had already risen back above the zero bound, i.e. relative to recent trend, the tightening of financial conditions had been unwound.

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19.12.2022

Between a rock and a hard place?

Qi model confidence in the S&P 500 continues to fall. Peaking in early October at 84% and trending lower since to 63% currently. Under the hood, this is likely a reflection of the shift in major drivers of the index.

Over this period, we have highlighted that this year’s strong negative relationship between bond yields and equities has shown signs of coming off its extremes. This is clear in the chart below showing that the negative sensitivity between real yields and the S&P 500 is becoming a less significant driver.

13.12.2022

Preventative medicine

2022 has been all about macro.

Before we close the book on this year and start thinking about 2023, twelve reminders - one from each month - of how the Qi framework has helped augment the traditional, bottom-up approach to equity investing.

The topics in the last two - for November and December - could become the dominant themes for investors in 2023.

January - an early warning

Qi's Vol Indicator often leads spikes in VIX and we saw that again at the start of 2022. Investors were given an early heads up that macro conditions were shifting and markets should brace for higher volatility.

12.12.2022

A narrow window

Bulls need renewed impetus from this week’s events with the investable window narrowing

1.) The negative dynamic between stocks and bonds yields is tentatively changing to its more normal stance.

There are tentative signs that the extreme negative relationship between bond yields and stocks peaked in early November. On a 3mth rolling basis, the correlation between the level of the S&P 500 and 10yr US bond yields reached a peak of -90% vs. -55% today.

Indeed over the last 4 weeks, stocks have moved lower (white line in the chart below) alongside lower bond yields (yellow line - inverted). In other words, investors instead of having FOMU are afraid more of being late to the game in the face of recession fears - the average of strategist’s 2023 forecasts for the S&P 500 is their most pessimistic call since 1999.

The change in the relationship between equities and bonds is important to define the length of this investable window – when further rallies in bonds do not help stocks it indicates that the equity market is now vulnerable to bad news.

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08.12.2022

Crude Oil

This latest down leg in WTI has taken it two standard deviations below trend on Qi metrics.

History shows it can go further. In April 2020, a Russia - Saudi Arabia dispute compounded Covid lockdowns & WTI futures briefly went negative. That was a six standard deviation event on Qi.

In Q4 2018, when the Fed was on autopilot with regards to rate hikes and risky assets feared a Powell policy error, WTI experienced a four standard deviation shock.

The 2015 lows (China devaluation shock, US oil production glut) was a similar size move.

So big macro shocks can have outsized impacts on the energy market. And a 2023 hard landing could certainly rival some of the above. But it is worth noting the magnitude of the move seen thus far.

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05.12.2022

Watching the defensives

The macro perspective on three defensive plays for equity investors:

Consumer Staples versus Consumer Discretionary

The chart shows macro fair value for the XLP / XLY ratio using our Short (blue) & Long (red) Term models.

Overall macro conditions supported Staples outperforming throughout the first half of 2022 but that trend peaked early summer, retraced over July / August and has been moving sideways since then.

Until recently.

In November macro conditions shifted and the trend for Staples to outperform re-established itself.

Simone Mascellari Xnn42Lsnv28 Unsplash Copy

30.11.2022

Lockdown vs. Re-opening
How to understand your China exposure

The news flow in China is highly volatile. Headlines veer between street protests, the authorities cracking down on any unrest, increased vaccination programmes for the elderly, growing Covid case counts, more lockdowns and so on.

One way Qi can help investors navigate China dynamics is to screen your portfolio for sensitivity to our Chinese macro factors.

This case study is a replica of September's "How to outperform tighter financial conditions". It showcases how Qi's macro factor sensitivities can help:

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09.01.2023

Earnings Season

This list isn't exhaustive but includes most of the blue chip names reporting earnings this week. And of that list, the majority sit to the left of our 65% threshold for a macro regime.

For these stocks, it's business as usual for a stock picker. Company fundamentals matter more than the macro environment.

Five names though display high sensitivity to macro conditions. There are no big valuation gaps but a couple of observations:

Boston Scientific is only 2.1% cheap to model. But that's the first time it has screened as cheap to macro since late June.
All three financials have seen increases in macro-warranted model value early in the new year. Since Dec 30th Blackrock's target price is up 4.3%, Jefferies model value has risen 4.6% and JP Morgan is up 5.1%. Macro conditions are improving.
In contrast, model value for Albertsons is flat-lining. Unlike financials, aggregate macro conditions for this consumer staple stocks is treading water, awaiting the next clue on direction.

05.01.2023

Tactical Trading

We have been talking for some weeks now about regime change in US equities. 2022 was all about the Fed; 2023 looks like it could be more about the real economy.

Mainly that’s because sensitivities are shifting – less about real yields, more about economic growth & industrial metals.

But it’s also because model confidence is falling.

However, Qi's Short Term models for US equity indices are extraordinarily strong. Using a 4month rather than 12month look-back period, macro explains 97% of the variance in the Dow!

In fact, there are a number of interesting observations we can take from our Short Term models right now. This quick video looks at:

the "true" January effect - tactical versus strategic trading, and the need for patience
how equities are closely tracking macro patterns. 2023 is once again shaping up to be a macro-driven year!

19.12.2022

Between a rock and a hard place?

The challenge to come back into a strong macro regime has not been aided by last week’s hawkish central bank meetings – which has served to keep policy uncertainty high into 2023. This uncertainty will be reflected best in the sensitivity to corporate credit spreads, which remain a major driver of the index.

The prior observation that bad economic news is good news for the equities, allowing the Fed to take their foot off the financial conditions pedal, is shifting. Policy error fears are being reflected more in a greater focus on economic growth.

Qi’s sensitivity to economic growth and metals has been trending higher. If the central banks insist financial conditions need to remain tight, hard landing fears increase.

This leaves risky assets between a rock and a hard place given the resolve of both the Fed and ECB last week – weaker economic data raises the spectre of recession; stronger data raises the spectre of rates remaining higher for longer.

This likely keeps equities in a fat and flat range with bounces being sold into until the regime becomes clearer.

Qi shows stocks relative to bonds moved into undervalued territory over December – but this again a reflection of the changing dynamic and not a signal.

The relative undervaluation is precisely because bond yields and stocks have seen a more positive relationship over the last month – yields down and stocks down.

If growth fears move to the fore, the risk remains that model value remains under pressure.

The majority of GICS level 1 sectors saw spot prices move below Qi model prices by the end of last week. However, model values are showing waning momentum.

We warned on Energy trading rich in an insight note in late November – it has been the weakest sector over the last month. Energy now stands at -0.8 sigma to model value.

However, again we are wary of reading into this too much when it is the most sensitive sector to inflation expectations, alongside high sensitivity to EM FX / China re-opening.

13.12.2022

Preventative medicine

February - More downside for speculative tech

Unprofitable tech names were the first mover in this bear market but, by Feb, had stopped falling and were attempting to consolidate.

Not on Qi.

Model value kept trending lower thereby opening up a significant rich valuation on a host of spec tech plays - FINX, CLOU, FDN, GNOM, BBH & IGV (chart).

Original Qi insight - More downside for spec tech?

March - catch up

In mid-March, on Qi’s models SPY screened as 5% cheap and QQQ was 11% below where it ‘should’ have been. Both represented significant valuation gaps and a flag that US equity indices had sold off too aggressively relative to macro conditions.

Qi model value for QQQ rose throughout March peaking on the 29th by which time the valuation gap had narrowed from -11% to just -1%. Thereafter model value resumed its downtrend.

Original Qi insight - Catch up

April - Brazil

Structurally bullish, tactically wary was the headline in our Apr 6th observation. The iShares ETF tracking Brazil EWZ was 15% rich on our models.

Even as a country set to benefit from the impact of Russia/Ukraine’s conflict on commodity markets, the machine was telling asset allocators a lot of good news was priced.

Over the next month EWZ fell almost 21%.

Original Qi insight - Structurally bullish, tactically wary

May - Bottom up meets top down: Dick's Sporting Goods

May 23rd and earnings season. Walmart and Target have already spooked markets with anecdotal evidence about inflation eating away at margins. Several US Retailers re due to report.

Qi flags that Dicks Sporting Goods is 25% cheap to model. Yes this week is about company fundamentals but a quick macro overlay identifies DKS as having discounted a lot of bad news already. Over the next three weeks it rallies 13.3%

Original Qi insight - Bottom Up meets Top Down: US Retailers

June - SPY vs. GOVT

On June 16th, Qi showed the S&P500 was at an extreme level relative to bonds. This was on top of an uptick in Qi model value for SPX. We surmised that macro conditions were improving at the margin, that SPY was cheap to GOVT and that quarter and half year-end re-balancing flows were imminent.

Over the next 8 weeks SPX rallied over 17% and equities outperformed bonds.

Original Qi insight - SPY vs. GOVT

July - Value vs. Growth & the power of macro

Low bond yields fuelled the bull market in Tech & Growth plays. So says the common wisdom. Like most truisms there is a fair degree of truth in it. But is it just about rates? What about other macro drivers?

Factor leadership changes, regimes shift, only a machine can capture the underlying patterns in real time. A nice example of how even when an equity investor thinks they’re using a factor-based approach, they’re actually running macro risk.

Original Qi insight - Proof! What Value needs to outperform Growth

August - measuring macro in one chart

The red line shows Qi model confidence for the S&P500. In bottomed and turned higher early in July, highlighting that the macro environment was ripe for a bear market squeeze.

It peaked early in August. Jackson Hole and Powell’s hawkish speech was still three weeks away but the machine was already recognising that financial conditions were shifting under the surface, getting nervous that the Fed Chair would double down on the fight against inflation.

September - How to outperform tighter financial conditions

A real-life case study showing how Qi’s macro factor sensitivities can help equity investors tweak their portfolio to avoid macro landmines.

Step one: quantify the fund’s key macro exposures – in this instance, US 10y real yields and US High Yield credit spreads.
Step two: identify the 10 stocks most vulnerable to higher yields and wider credit spreads, and the 10 most resilient.
Step three: no need to divest core holdings, tweak the weights according to their macro factor sensitivity.

The result? Qi’s choice of resilient stocks outperforms the most vulnerable by 7%, and the S&P500 by 3% over the subsequent 3 weeks.

Original Qi insight - How to outperform tighter financial conditions

October - Credit Impulse

Stock pickers do not have time to closely monitor shifts in the macro landscape. Qi can be your eyes-and-ears.

Our Credit Impulse aggregates financial conditions into a single measure, capturing when liquidity is being tightened or loosened.

Snapped at the end of October, our Credit Impulse suggested a large amount of the Fed’s tightening in 2022 had been unwound.

Original Qi insight - Dovish pivot? Its already happened

November - US equities: a shift in factor leadership?

For most of 2022 the message from Qi has been simple – the Fed’s tightening of financial conditions is pushing macro conditions against US equity markets.

But over the course of Q4 that pattern started to change and new leadership started to emerge – tentative signs that the real economy could become more important than financial conditions. Presumably a reflection of the market pricing in peak Fed Funds around 5.0%, and now a greater focus on whether 2023 produces a hard or soft landing.

That could imply the reaction function of equities is shifting.

For much of the year, ‘bad news’ that stays the Fed’s hand in raising rates, was deemed ‘good news’. A focus on the real economy and fears of a recession could suggest equities will start to recognise bad news = bad news.

Original Qi insight - US equities - a shift in factor leadership?

December - a big 2023 reversal?

Qi’s model value for USDJPY fx fell 1.5% over November and is down 0.9% so far in December. A pause that refreshes the Dollar bull market, or a critical new trend for the new year?

The strength of the Dollar has been a huge factor for equities in 2022. How is an equity investor supposed to keep an eye on shifts in currency markets?

05.12.2022

Watching the defensives

Utilities versus S&P500

It's a similar pattern with Utilities outperforming the broader US equity market from January to June. There followed a retracement and a period of sideways price action.

Qi's Short Term model has just moved into a new regime - model confidence has risen from 27% at the start of October to 83% now.

Watching the blue line will be interesting. There are tentative signs it is basing. It could break either way but any upturn would suggest the broad macro environment is once again pointing to Utilities outperforming and a defensive allocation.

Infrastructure

PAVE is an ETF of US single stocks that benefit from US infrastructure projects. It is all about macro. Short term model confidence is 95%; Long Term model confidence is 89%.

And what does the macro picture currently say? There is a strong uptrend in macro-warranted fair value regardless of the look-back period employed.

There is no real valuation edge. PAVE is a very modest 0.5% below ST model value, and 1.0% cheap to LT model. But the aggregated picture of economic fundamentals, financial conditions and risk appetite point to a friendly backdrop for US infrastructure.

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