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  • Macro Strategy Chartbook

    August 2018

  • Executive Summary

    • Valuation is presenting a mixed picture. Shorter- term, the S&P 500 appears cheap, but investors increasingly believe that we’re approaching peak earnings. Longer term, blue chips are trading above the 80th percentile of their historical range, exceeded only by the tech bubble.

    • US economic growth is solid, as economists are predicting 4 per cent growth in Q2. Overseas economies are posting better than expected results after disappointing forecasters last month.

    • Liquidity measures improved last month after coming close to a breakdown. Credit spreads contracted incrementally and volatility subsided somewhat. The yield curve continues to flatten, however, although intermediate rates are tethered to an easy ECB.

    • Headline worries frightened investors over the last few weeks, pushing sentiment toward bearishness. That’s a good sign for this contrary indicator.

    • Technical conditions remain in “risk-on” mode, although technicals tend to be a lagging indicator. Particularly interesting was the breakdown between emerging market equites and a breakout in small caps relative to the S&P 500.

    2 Source: Bloomberg

    Cresset Wealth S&P 500 Metrics: August 2018

    Bullish Bearish

    1 2 3 4 5

    q q

    q q

    q q

    q q


    Source: Bloomberg; Cresset Wealth Advisors

    Chart #0838


    Cresset Wealth S&P 500 Metrics

    August 2018






  • Table of Contents


    Slide Page No. Slide Page No.

    The Global Consumer 4 The Labor Market 15

    Central Bank Policy 5 Stocks for the Long Term 16

    Direct Investing 6 Goals-Based Investing 17

    Currency Monitor 7 Goals-Based Strategies 18

    The Market Impact of Trade Tariffs 8 Interest Rate Implications 19

    Credit Conditions 9 Asset Class Assessment 20

    US Retail Sales 10 Implications of Trade Tariffs 21

    The US Economy 11 US Equities: What’s Working? 22

    Brexit 12 Emerging Market Dynamics 23

    Household Fundamentals 13 Market Technicals 24

    Inflation Watch 14 Disclosures 25

  • 4

    The Global Consumer Overview

    Euro Area Retail Sales vs Confidence

    Japan Retail Sales vs Confidence

    Retail Sales YoY Growth through July 2018

    • Retail sales have been strong domestically, fueled by strong consumer confidence.

    • Internationally, retail activity has been steady.

  • 5

    Central Bank Policy Overview

    Inflation Rate by Selected Countries

    Central Bank Policies: Overnight Yields

    The Fed Funds Rate vs the Taylor Rule

    • The Fed is on an independent tightening path, while foreign central banks have stood path.

    • Investors are beginning to wonder if the Fed will overshoot.

  • 6

    Direct Investing

    • Direct investing has been a critical element of family offices’ portfolios.

    • Private equity, private debt, real estate and infrastructure comprise a diversified direct investing strategy.

    • Direct private equity and real estate represent 29 per cent of family office portfolios currently.


    Average Family Office Portfolio Distribution

    Share of Family Offices with Direct Real Estate Exposure

    Private Investing by Type

  • 7

    Currency Monitor Overview

    Purchasing Power Parity (using CPI)

    Inflation Expectations and the Dollar

    Major Currencies Denominated in Gold

    • The dollar is fairly valued fundamentally, although the yen is cheap.

    • The dollar has been tracking inflation expectations since diverging in January.

    • Most currencies are lower versus gold and countries jockey for trade advantages.

  • 8

    The Market Impact of Trade Tariffs Overview

    NAFTA Problems could Hit these States

    S&P 500 Sector Performance YTD

    Chinese Yuan per Dollar

    • US investors shifted into domestic sectors, like utilities and telecom and have sold basic materials and industrials which rely on trade.

    • The Chinese has secretly devalued the yuan to offset near term trade challenges.

    • Chinese stocks are bearing more of the brunt of the trade dispute.

  • 9

    Credit Conditions Overview

    Credit Conditions Model History

    10-Yr BBB Bond Yield less 10-Yr Treasury Rate (%)

    HY Bond Spreads vs Corporate Bonds Outstanding

    • Credit conditions reversed course and improved over the last four weeks, helping prolong a “risk-on” environment.

    • Historically, credit spreads have been a good risk environment indicator.

    • Massive corporate bond issuance argues for higher yield premiums. The search for yield is keeping spreads low.

  • 10

    US Retail Sales

    Best and Worst Retail Sales Growth YoY thru June

    Inflation Expectations and Spending

    Retail Sales shifting Online

    • Retail sales growth is coupled with inflation expectations.

    • Gas stations and jewelry stores led retail sales growth over the last 12 months.

    • Brick and mortar continues to lose ground to online retailers.


  • 11

    The US Economy Overview Comparative Economic Expansions

    Manufacturing Employment vs Manufacturing PMIAtlanta Fed Q2 2018 Growth forecast

    • The current expansion is the shallowest recovery in recent memory. That suggests fewer excesses.

    • The Atlanta Fed’s “GDP Now” model is forecasting 4.5 per cent growth in Q2.

    • US manufacturing growth remains robust despite the tariff threat.

  • 12

    Brexit Overview

    Brexit Timeline

    Pound, Euro and Yen vs The Dollar YTD

    Countries Hardest Hit by Brexit

    • The pound continues to falter in the aftermath of Brexit. The euro is suffering also.

    • March 2019 is Brexit date.

    • Besides the UK, Ireland and Germany will be most affected by Brexit.

  • 13

    Household Fundamentals Overview

    Income Growth by Income Quintile

    The Real Cost of Gasoline on Consumers

    The Saving Rate as a Percentage of Disposable Income

    • Gas prices are high, but higher wages and fuel efficiency have mitigated their impact on household budgets.

    • Lower income households are participating in income gains this cycle.

  • 14

    Inflation Watch Overview

    Actual Inflation versus Inflation Expectations

    Wage Growth versus Core Inflation

    Components of Consumer Prices through June 2018

    • Wage growth and core inflation are moving in unison.

    • Transportation, thanks to higher pump prices, is leading the inflation components.

    • Actual inflation is tracking inflation expectations.

  • 15

    The Labor Market Overview

    Share of Service Jobs

    America’s Jobs Market

    Best and Worst One Year Job Growth by Industry

    • 68 per cent of America’s jobs today require at least some college.

    • Service jobs are knowledge jobs and 86 per cent of today’s jobs are in the service sector.

    • Educational services, construction and oil & gas extraction sectors had the strongest job growth.

  • 16

    Stocks for the Long Term

    • Capital has far and away outpaced wages for decades.

    • Dividends growth has outpaced inflation.

    • Increased holding period is the best way to mitigate risk.


    S&P 500: Longer Holding Periods Reduce the Change of a Loss

    Income vs Capital: Saving vs Spending

    S&P 500 Dividend Growth vs Inflation

  • 17

    Goals-Based Investing

    • Aligning investments with investors’ goals is the best insulation against the vagaries of the market.

    • Portfolio volatility is one of the most insidious risks retirees face.


    In Retirement, Volatility Matters

    Building an Investment Strategy to Meet Needs, Wants, and Wishes

    Goal-Based Asset Allocation

  • 18

    Goals-Based Strategies

    • Investment strategies designed to meet investors’ cash flow needs.

    • Matching holding periods to cash flow is the critical ingredient.


    Return Distribution for Cresset Growth Strategy

    Return Distribution for Cresset Lifestyle Strategy

    Standard Deviation for Cresset Strategies

  • 19

    Interest Rate Implications Overview

    10-Year Yield versus Copper/Gold

    The Slope of the Yield Curve

    Interest Rates and the Economy

    • Will an inverted yield curve send an ominous signal this time around? Who knows. The ECB controls the 10-year Treasury yield though.

    • The relationship between copper and gold imply lower yields.

    • Nominal GDP suggests the benchmark Treasury yield should be substantially higher.

  • 20

    Asset Class Assessment

    Asset Class Performance YTD thru July 2018

    ETF Fund Flows

    Asset Class Valuation Comparison

    • Emerging market investors are turning tail even though the asset class appears relati

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