HomeSolutionsInsightsNewsroomPeopleContactLogin

Acclaimed macro analytics
Portfolio Construction & Risk Management
Trading Solutions
Macro Models
Thematic equity baskets

Announcements
Press
Blog

The glib response would be Qi shows US equities in strong macro regimes, narrowing their valuation gaps relative to last week’s oversold levels, but still catching up with rising model value. Check out the Historical Model Value chart for SPY or re-read “Catch up”.

Another explanation doing the rounds is the relative value facing asset allocators when deciding between stocks & bonds. Bonds are selling off because of inflation, & equities are a better inflation hedge goes the narrative. The ‘There Is No Alternative’ mantra is back.

Qi’s SPY vs. GOVT model is on the cusp of a new macro regime. Having traded sideways for much of 2022, the macro model value now points to a new uptrend – S&P500 to outperform US Treasuries. Having been cheap to bonds, stocks have played catch up.

The new regime is dominated by rising inflation, Fed rate hikes, low risk aversion & tight credit spreads - together they explain two thirds of the model & point to equities outperforming bonds.

On current patterns, equities are enjoying a relative sweet spot. If the Fed can pull off the balance between tightening policy without prompting “risk off”, equities can continue to ‘climb the wall of worry’.

But bears worry that rising equities undermine Fed efforts to tighten overall financial conditions. Under this scenario rising equities sow the seeds of their own downfall by provoking a more hawkish Fed.

On Qi, watch the Fed rate expectations & inflation expectations factors. If those relationships flip from positive to negative, that downside scenario is panning out.

Also watch Qi’s Fair Value Gap. Currently just +0.4 sigma (+1.5%) but it’s a tight distribution: +0.8 sigma is the FVG high for the last year.

US equities were cheap going into the FOMC. Even after yesterday’s squeeze, they remain modestly below macro-warranted fair value.

NASDAQ was the cheapest before the Fed & remains over one sigma below fair value today. Amongst its peers it remains the best stagflation play & RETINA™ continues to throw out bullish signals on various tech instruments – QQQ, XLK, Growth etc.

More broadly, current patterns suggest that, for now, US equities are comfortable with a degree of tightening in financial conditions. Fed rate hikes & a stronger Dollar are positives. Rising real yields, wider credit spreads hurt.

Just as well. Last night showed the Fed are intent on moving policy beyond neutral, but the nature of that move is key. A Fed glide path that ensures real yields stay negative & credit default rates stay low is critical for risky assets.

Indeed, it is worth noting that both HYG & the 5s30s curve are showing tentative signs of an inflection in macro model value. Neither move is yet definitive but improving macro conditions here would be critical. Wider credit spreads & yield curve inversion remain the two best signals that the Fed is moving too fast & breaking things.

Finally, the China news is arguably as important & equally noisy. Model confidence is low across several Chinese equity sectors – regulation dominates. But macro still matters & shows all sectors as cheap to fundamentals.

Of those in regime, financials CHIX looks the most efficient expression for those thinking the shift in Beijing’s policy stance provides a green light to buy the dip.

That’s reflected in Qi’s snapshot of China across asset classes where every model is cheap to macro. That’s most acute for large cap China FXI; least acute for pan Asian High Yield KHYB & Rare Earth ETF REMX.

The only redeeming feature is that the recent sell-off has left Chinese assets having absorbed a fair degree of bad news, at least in macro terms. Qi’s China multi asset watchlist will give real-time updates on the relative leaders & laggards.

For domestic Western investors the critical question is what are the implications? Chinese tracking GDP is a core input in every equity model. In the chart below we show those US & European sectors in regime & their sensitivity to Chinese growth.

Three are especially reliant on Chinese growth. European Retail has a slight advantage in that it’s modestly cheap. US Energy has the commodity dynamic but European Travel & Leisure displays the highest sensitivity &, relatively speaking, starts from a rich valuation.

Qi’s QQQ vs. SPY model shows the NASDAQ as 1.1 sigma or 2.9% cheap to the macro environment (chart below). The inflection signal points to QQQ outperformance to catch up with macro conditions.

In risk premia space the message is consistent across VTV vs. VUG & IWD vs. IWF – growth is cheap to value. Both show macro fair value flat-lined over Feb / early March, while the spot price moved higher as Value outperformed.

But, over the last 3 days, spot & model have turned lower together. The result is a bearish inflection signal – Growth can outperform once again.

Aside from valuation, the other striking feature is that, as per “Worried about stagflation?”, the macro regime shows tech / growth looks a decent stagflation play.

Lower economic growth, commodity prices, real rates; combined with rising inflation expectations, tighter USD liquidity & a stronger Dollar are all consistent with QQQ / Growth outperformance.

If you fear a stagflation scenario, tech currently displays some nice defensive properties. And, at current levels, one with a valuation edge.