market digest – may 2021

Table of contentsExecutive Summary 2

Global Allocation 3-5

Europe Equities 6

U.S. Stock Market 7-11

U.S. Sectors 12-14

Thematic Opportunities 15

Global Economics 16-19

U.S. Fixed Income 20-22

U.S. Economics 23-26

NDR Hotline 27

Glossary of Terms 28-29

House Views 30

A M Y L U B A S , C F A , D I R E C T O R , W E A LT H M A N A G E M E N T & A D V I S O R Y S O L U T I O N S

C H A D E L L I S , R E S E A R C H A N A LY S T

Market Digest – May 2021

Rising inflation concerns

M A Y 1 7 , 2 0 2 1 2P E R I O D I C A L | I S S U E : # M K T D G 2 0 2 1 0 5 1 7 | N D R . C O M Please see important disclosures at the end of this report.

M A Y 1 7 , 2 0 2 1

M A R K E T D I G E S T S U M M A R Y

A M Y L U B A S , C F A D I R E C T O R , W E A LT H M A N A G E M E N T & A D V I S O R Y S O L U T I O N SC H A D E L L I S R E S E A R C H A N A LY S T

Executive SummaryWe are watching for a breakout in long-term

market-based inflation expectations. Today,

those are on the cusp of breaking out,

as shown on the chart to the right. The

5-year/5-year forward breakeven rate is

close to our threshold of 2.4%. Investors are

concerned the Fed may have to tighten its

accommodative policies in order to stifle

inflation. But is the latest global sell-off the

start of a major decline? We don’t believe

so. If it was time to “sell in May and go

away,” then we would be seeing a lot more

divergence and breadth weakness than we

have seen since the decline got underway.

Below are our thoughts about the outlook

for the economy and markets:

Global and U.S. Economy. The global

economy picked up pace significantly in

April, according to the latest PMIs. The

vaccine rollout and massive stimulus has

driven a significant rebound in the U.S.

As a result, inflation measures are rising

around the world, worrying investors that

a tightening of monetary and fiscal policy

may not be too far off. We believe inflation

remains transitory, but we will be monitoring

our indicators closely.

Global Asset Allocation. On April 22, we

upgraded our gold outlook back to bullish

from neutral. Our Daily Gold Model reached

its highest levels since early January. And

the bullish long-term influences have only

become more decisive.

Fixed Income. Market-based measures of

inflation expectations are nearing key levels.

Credit is expensive on an historical basis,

as fundamentals remain compelling and the

economy recovers. We remain overweight

high yield.

U.S. Stock Market. The economic cycle

and NDR Cycle Composite turn negative

for stocks in the second half. Macro and

earnings indicators are quickly transitioning

from bullish to bearish. Technical indicators

remain bullish, but deterioration could

dictate we lower our current bullish outlook.

U.S. Sectors. All sectors saw positive

returns in April, but leadership became more

mixed. On May 13, we downgraded Tech to

underweight and upgraded Health Care to

marketweight.

Thematic Opportunities. The bounce

in FANMAG generated Tech Titan

outperformance. Infrastructure ETFs

continued to see positive money flow. We

believe the Biden spending plan and COVID

reopening beneficiaries will outperform most

tech-related themes this year.

On cusp of breaking above prior highs

© Copyright 2021 NDR, Inc. Further distribution prohibited without prior permission.All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html

For data vendor disclaimers refer to www.ndr.com/vendorinfo/

B781

U.S. 5-Year / 5-Year Forward Inflation and Inflation Swap Daily Data 2004-07-21 to 2021-05-11



B781


0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.005-Year / 5-Year Inflation Swap 2021-05-11 = 2.55% Mean = 2.63%5-Year Implied Forward Inflation 2021-05-11 = 2.38% Mean = 2.24%

Source: Federal Reserve Board, Bloomberg Finance L.P.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-0.250.000.250.500.751.001.251.501.752.002.252.502.753.00

-0.250.000.250.500.751.001.251.501.752.002.252.502.753.00

Inflation Swap minus Forward Inflation 2021-05-11 = 0.17% Mean = 0.39%


M A Y 1 7 , 2 0 2 1

T I M H A Y E S , C M T C H I E F G L O B A L I N V E S T M E N T S T R A T E G I S TA N O O P N A T H , C F A G L O B A L A N A LY S T

Key Takeaways

M A R K E T D I G E S T G L O B A L A L L O C A T I O N

Bullish on gold again

• Bullish evidence described by Gold Watch aggregate.

• U.S. dollar downtrend has resumed, with massive liquidity as a negative influence.

• Breadth deterioration from the recent sell-off has been limited.

We had downgraded gold from bullish

to neutral at the beginning of March,

responding to the negative influence of

rising bond yields and gold’s decline below

its 50- and 200-day moving averages.

Recognizing the persistent bullish

influences, we made the downgrade in

the midst of mixed messages, calling for a

neutral approach but not a bearish view.

Since then, the bond yield advance has

given way to yield stability and gold has

been recovering, rising back above the

50-day moving average. On April 22, we

upgraded our gold outlook back to bullish

from neutral. Our Daily Gold Model reached

its highest levels since early January. And

the bullish long-term influences have only

become more decisive.

Most notably, liquidity has become

increasingly massive in the U.S. and globally,

while real interest rates have become more

negative. As global liquidity has continued

to surge, inflation expectations have risen

sharply — a positive sign given gold’s status

as the ultimate inflation hedge. And as gold

has rejoined the broader commodity bull

market and revived its long-term uptrend, it

has maintained an inverse correlation with a

U.S. dollar that’s in a long-term downtrend.

Our Gold Watch report again describes

a consistency of bullish evidence (chart

above), and we are now bullish in response.

Renewed U.S. dollar weaknessAmong other considerations in upgrading

gold, we have recognized a U.S. dollar

downtrend that has been regaining downside

momentum. Evident in their inverse

correlation, gold tends to benefit from dollar

weakness, and sentiment indices on gold and

the dollar often move in opposite directions.

Gold sentiment has been reversing higher

from excessive pessimism while dollar

sentiment has been reversing lower from

extreme optimism, with the contrasting

sentiment reversals driving gold’s revival and

the dollar’s reassertive descent.

Majority positive in Gold Watch report

© Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior

permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html.


Customized version of I65BCustomized version of I65B

Jan2018

Apr Jul Oct Jan2019

Apr Jul Oct Jan2020

Apr Jul Oct Jan2021

Apr

1,122

1,259

1,413

1,585

1,778

1,995

1,122

1,259

1,413

1,585

1,778

1,995

20

30

40

50

60

70

20

30

40

50

60

70

** London-based prices prior to 1970 due to fixed prices in the U.S. Source:Source: Bloomberg Finance L.P.

Composite updates start when 10 of the 17 Gold Watch indicators become active Source:Source: Ned Davis Research, Inc.

Daily Data 2017-12-29 to 2021-04-21Gold vs. Gold Watch Indicators

Gold Bullion Performance

Full History:Full History: 1969-08-01 to 2021-04-21

% Bullish Indicators is

% Gain/

Annum

% of

Time

Above 50.0 24.87 30.79

25.0 - 50.0 6.11 44.95

Below 25.0 -8.60 24.26

Buy/Hold = 7.54% Gain/Annum

Gold Bullion Performance

Chart View:Chart View: 2017-12-29 to 2021-04-21

% Bullish Indicators is

% Gain/

Annum

% of

Time

Above 50.0 13.71 36.89

25.0 - 50.0 7.95 52.27

Below 25.0 2.72* 10.84


* Cases less than one year are not annualized

Gold Bullion Spot Price** (2021-04-21 = $1792.3)

Percentage of Bullish Gold Watch Indicators (2021-04-21 = 58.8%)


4 | N E D D A V I S R E S E A R C H

A continuing dollar decline would have

implications not only for gold, but also for

global markets. The MSCI U.S. Index and

the dollar has the most inverse 52-week

correlation of the All Country World Index

(ACWI) component markets (chart right). As

the U.S. accounts for 57% of the ACWI’s market

cap, the global index would likewise stand to

benefit from continuing dollar weakness.

If the U.S. Dollar Index continues to trend

lower, confirmed by the equal-weighted

dollar, we will watch for strength in emerging

market currencies, which would increase the

chances for absolute and relative strength in

emerging markets.

Above excerpted from: “Bullish on gold

again” and “The influence of renewed dollar

weakness” by Tim Hayes, April 22 and 29,

2021, respectively


Watching indicators in a sell-offIs the latest global sell-off the start of a

major decline? The answer has been “no”

so far. If in fact it was time to “sell in May

and go away,” then we would be seeing a

lot more divergence and breadth weakness

than we have seen since the decline got

underway.

Among the breadth gauges to watch is the

percentage of markets above their 50-day

moving averages (chart left). With a drop

below 50%, the indicator would add a sell

signal to the Stock/Bond Composite of our

Global Balanced Account Model. When most

stocks are trending lower, they are reflecting

the worsening economic outlook that makes

valuations appear unjustified, hence the

broad-based selling.

U.S. market and dollar have strongest inverse correlation



ICS_502.RPT

Correlation between United States's Currency & Stock Market Weekly Data 2011-04-24 to 2021-04-25 (Log Scale)



ICS_502.RPT

Correlation between United States's Currency & Stock Market Weekly Data 2011-04-24 to 2021-04-25 (Log Scale)

1,0591,1221,1891,2591,3341,4131,4961,5851,6791,7781,8841,9952,1132,2392,3712,5122,6612,8182,9853,1623,3503,5483,7583,981

MSC

I Uni

ted

Stat

es In

dex

939598

100102105107110112115117120123126129132135138141145148151155

U.S. D

ollar Equal-Weighted Index*

Source: MSCI*U.S. Dollar Equally Weighted vs. Currencies of MSCI ACWI Countries

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-0.9-0.6-0.5-0.3-0.10.00.10.30.50.60.9

-0.9-0.6-0.5-0.3-0.10.00.10.30.50.60.9

Dashed Line Represents Historical Mean

Rolling 52-Week Correlation of Weekly % Changes in MSCI United States Index & Equal-Weighted U.S. Dollar

Moving Correlation Periods: 1352 156Data Range (Years): 1 2 3 5 10 20 Max




Customized version of Customized version of I4111I4111

Jul Oct Jan

2019

Apr Jul Oct Jan

2020

Apr Jul Oct Jan

2021

Apr

112

126

141

158

178

200

224

251

112

126

141

158

178

200

224

251

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Source:Source: MSCI

Source:Source: Ned Davis Research, Inc.

Daily Data 2018-05-14 to 2021-05-12

Global Stock/Bond Ratio vs. Percent of MSCI ACWI Markets Above Their 50-Day Moving Averages

Bullish above 50%.

Bearish below 50%.

Global Stock/Bond Ratio Performance


MSCI ACWI Breadth

Indicator is

% Gain/

Annum

% of

Time

Bullish 10.85 62.19

Bearish -10.19 37.81


Global Stock/Bond Ratio Performance

Chart View:Chart View: 2018-05-14 to 2021-05-12

MSCI ACWI Breadth

Indicator is

% Gain/

Annum

% of

Time

Bullish 14.45 61.79

Bearish -4.25 38.21


Global Stock/Global Bond Total Return Ratio (2021-05-12 = 225.71)

Percent of MSCI ACWI Markets Above Their 50-Day Moving Averages (2021-05-12 = 54.0%)

Watch global breadth




As with gauges of market breadth,

momentum tends to peak ahead of market

tops and reach lower highs at the bull

market extreme. The momentum gauge

reached a record high of 69% at the

anniversary of the market low last March

and has since receded to 40%.

Like the uptrends in the stock and

commodity benchmarks, our rising Risk-

On/Risk-Off Ratio has reflected a global

economic outlook that has continued

to improve. The ratio has maintained a

positive one-year correlation with the ACWI

(currently 0.76). Both are maintaining strong

uptrends despite the sell-off (chart right).

With the exception of the relative strength

of the ACWI Information Technology sector,

all of the risk-on proxies are currently in line

with or above their 50- and 200-day moving

averages.

With measures of breadth, momentum, and

RO/RO indicating that the cyclical uptrend

is still well intact, the sell-off has corrected

excessive optimism and produced an

oversold condition. The declines sent the

DSI Sentiment Composite from excessive

optimism readings to lows in the range of 58

to 64 (chart left).

As long as liquidity remains abundant and

the outlook for economic and earnings

growth continues to improve, another

bear market will be a low probability. The

latest decline has provided another buying

opportunity within a bull market that’s likely

to remain intact as 2021 progresses.

Above excerpted from: “Watching

indicators in a sell-off” by Tim Hayes, May

13, 2021

RO/RO trending higher with ACWI




Customized version of I158KCustomized version of I158K

Jul Oct Jan

2019

Apr Jul Oct Jan

2020

Apr Jul Oct Jan

2021

Apr

457

479

501

525

550

575

603

631

661

692

724

759

794

457

479

501

525

550

575

603

631

661

692

724

759

794

158

178

200

224

251

282

316

158

178

200

224

251

282

316

Source:Source: MSCI


Daily Data 2018-05-14 to 2021-05-12MSCI ACWI vs. RO/RO Ratio Moving AveragesMSCI ACWI (2021-05-12 = 788.79)

50-Day Moving Average (2021-05-12 = 791.50)


Risk-On / Risk-Off Index (2021-05-12 = 322.39)



Excessive optimism relieved




Customized version of Customized version of I4121AI4121A

15 1

Jun 2020

15 1

Jul 2020

16 3

Aug 2020

17 1

Sep 2020

16 1

Oct 2020

15 2

Nov 2020

16 1

Dec 2020

15 4

Jan 2021

1

Feb 2021

1

Mar 2021

15 1

Apr 2021

16 303

May 2021

158

166

174

182

191

200

209

219

229

158

166

174

182

191

200

209

219

229

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

Source:Source: MSCI

Optimism

Pessimism Source:Source: DSI trade-futures.com

Daily Data 2020-05-12 to 2021-05-12Global Stock/Bond Ratio vs. DSI Global Sentiment CompositeGlobal Stock/Global Bond Total Return Ratio* (2021-05-12 = 225.71)

DSI Global Sentiment Composite** (2021-05-12 = 60.00)


M A Y 1 7 , 2 0 2 1

Key Takeaways

• Tactical indicators suggest under-weight in European Health Care.

• But key global trends and a history of profitability provide a secular case for owning Health Care stocks.

• Relative valuations also look attractive.

A look at European Health Care

M A R K E T D I G E S T E U R O P E E Q U I T I E S

M A R K P H I L L I P S N D R E U R O P E A N E Q U I T Y A N A LY S T

After a strong second half in 2019, Health

Care stocks hugely outperformed in the

first half of 2020 with the onset of the

coronavirus pandemic, only to see them

give back most of their outperformance

in the last year (chart above). The Health

Care sector underperformed the market by

33%, as investors switched from defensive

stocks into those set to benefit from the

economic recovery. The Health Care sector

also provides exposure to major global

secular trends. Global health care spending

is projected to increase at an annual rate

of 4.2% from 2019 to 2024. Beyond that,

demand is likely to continue increasing due

to a globally aging population, an increasing

middle class in emerging countries, and the

increased prevalence of chronic disease.

However, Health Care sales also face

pressure from price regulation as

governments will also seek to control Health

Care expenditure and pay attention to the

regulation of drug prices.

Our new European Health Care report

provides a list of indicators to watch in order

to gauge when to become more bullish

on the sector. Nine out of 10 technical

indicators are on a sell signal, suggesting

a tactical underweight. External indicators,

macro and sentiment, are also signaling an

underweight, with two thirds of indicators

on a sell signal. Valuations look attractive,

especially on a dividend yield basis.

However, the weight of the evidence still

favors a tactical underweight in European

Health Care. We view the long-term outlook

for the Health Care sector as broadly

positive relative to the European market.

Above excerpted from: “European Health

Care – what to watch” by Mark Phillips,

April 27, 2021 (available through NDR’s new

Europe Strategy product)

The rise and fall of Health Care

© Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without priorpermission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html


EURF21_12A_C

MSCI Europe Health Care Returns vs. MSCI Europe Daily Data 2019-04-23 to 2021-04-23

© Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without priorpermission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html


EURF21_12A_C

MSCI Europe Health Care Returns vs. MSCI Europe Daily Data 2019-04-23 to 2021-04-23

2019May Jun Jul Aug Sep Oct Nov Dec

2020Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2021Jan Feb Mar Apr

97.5100.0102.5105.0107.5110.0112.5115.0117.5120.0122.5125.0127.5130.0132.5135.0137.5140.0142.5145.0147.5150.0152.5155.0

97.5100.0102.5105.0107.5110.0112.5115.0117.5120.0122.5125.0127.5130.0132.5135.0137.5140.0142.5145.0147.5150.0152.5155.0

Relative Strength LinesHealth Care (Sector)Health Care Equipment & Services (Industry Group)Pharmaceuticals, Biotechnology & Life Sciences (Industry Group)Pharmaceuticals (Industry)

Source: MSCI

Lines show industry total return indexdivided by MSCI Europe total return indexrebased to 100 at start

Index Total Returns in Euro

Index Last 2 Years Last Year PreviousYear

Health Care 25.9 0.2 25.6

Health Care Equipment & Services 30.6 23.2 6.0

Pharmaceuticals, Biotechnology & Life Sciences 24.4 -4.0 29.5

Pharmaceuticals 20.6 -6.2 28.6

MSCI Europe 16.4 33.3 -12.6


M A Y 1 7 , 2 0 2 1

Key Takeaways

E D C L I S S O L D , C F A C H I E F U . S . S T R A T E G I S TT H A N H N G U Y E N , C F A S E N I O R Q U A N T I T A T I V E A N A LY S T

M A R K E T D I G E S T U . S . S T O C K M A R K E T

• The economic cycle and NDR Cycle Composite turn negative for stocks in the second half.

• Macro and earnings indicators are quickly transitioning from bullish to bearish. Technical indicators remain bullish, but deterioration could dictate we lower our current bullish outlook.

• We compare the few historical cases of major tax reform.

Building the bear caseIn our 2021 outlook, we outlined a thesis of

a strong first half followed by a weak second

half. Five months into the year, several

indicators are lining up. The S&P 500 is up

11.5% year-to-date, so the first half has been

playing out as expected.

Meanwhile, several macro and earnings

indicators are in the process of transitioning

from their most bullish readings in years

to bearish in the coming months. Some,

notably sentiment, are already there.

Technicals are a major exception. They

remain bullish. If breadth were to deteriorate,

the market would have few legs to stand

on. Before diving into specific indicators, we

should mention that the potential shift in the

weight of the evidence is lining up with two

independently derived historical cycles.

History’s view of 2021 First, the NDR S&P 500 Cycle Composite

traces a pattern of a choppy uptrend into

July/August, an autumn decline, and a weak

year-end rally (chart above). The composite

is an average of the one-year cycle, four-

year cycle (post-election years), and

decennial cycle (years ending in 1). Think of

it as history’s view of how 2021 could unfold.

Some years, like 2010, the market tracks the

Cycle Composite closely. In others, like 2009,

outside forces overwhelm historical norms.

Year-to-date, the market has been tracking

the Composite quite well, but in order to

downgrade our bullish intermediate-term

outlook on U.S. equities, we will need hard

indicator evidence.

Second half risks S&P 500 Cycle Composite: strong 1H, weak 2H



S01666

S&P 500 Cycle Composite for 2021 Daily Data 2020-12-31 to 2021-12-31



S01666

S&P 500 Cycle Composite for 2021 Daily Data 2020-12-31 to 2021-12-31


2022Jan

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

2021 Cycle CompositePlaces Equal Weight On:One-Year Seasonal CycleFour-Year Presidential Cycle10-Year Decennial Cycle

Trend Is More Important Than LevelBased on Daily Data 1/3/1928 - 12/31/2020

Lines represent cumulative year-to-date percent gains

S&P 500 Cycle Composite for 2021 (Scale Right)Actual S&P 500 Composite Through 2021-05-10 (Scale Left)

Source: S&P Dow Jones Indices



Market vs. economic cycleThe economic/earnings cycle is nearing

a phase when the stock market endures

bigger corrections or shallow cyclical bear

markets (chart below).

The pattern is as follows:

• Recession bear. The worst bear

markets are associated with recessions

because growth is below potential, and

earnings are depressed.

• Post-recession bull. Eventually, all

of the weak holders sell, stocks hit

oversold extremes, and the market

begins to rally. On average, the stock

market bottoms four months before the


2 stock market cycles for every economic cycle, on averageStock Market and Economic Cycles

Stock Market Cycle

~ 4 MONTHS ~1 - 2 YEARS ~ 7 MONTHS

~ 6 MONTHS

~ 6 MONTHS - 5 YEARS

Economic/Earnings Cycle

RECESSION

EXPANSION

EARNINGS DEPRESSED

ECONOMY TROUGHS

AVERAGE TIME

EXTREME PESSIMISMOVERSOLD

EXCESSIVE OPTIMISM

OVERBOUGHT

EXTREME PESSIMISMOVERSOLD

RECESSION BEAR

P

OST RECES

SION B

ULL

NON-RECESSION “ECHO” BEAR

POST “ECHO” BULL

mul

tiple

exp

ansi

on

EXTENDED M

EAN R

EVERSION

modest

multip

le expansion

S

HORTER MEAN REVERSION

earnings rebound margins

earnings growth moderates margins flat

You are here?

Echo Bears• Large-Caps• High Quality• Utilities• Consumer Staples• Health Care• Dividend Payers

Early Cycle• Small-Caps• Low Quality

• Financials• Industrials

• Materials• Dividend Non-Payers

end of the recession. The difference between the 2020-present case and the average cycle is compressed time and amplified magnitude, not the pattern.

• Echo bear. As the expansion moves

deeper into its second year, investors

shift their focus to the inevitable

slowdown in growth. Fear of a double-

dip recession is part of the psychology

of the decline.

• Post-echo bull. As investors realize a

double-dip recession is not unfolding,

the market enters a longer, but slower-

paced post-echo bull. They can range

from 1-5 years, with a median GPA of

27.5%. Applying the median to the current cycle, the market is at risk of an echo bear early in the second half of 2021.



Two analogs: 1982 and 2009The March 2020-present rally is

approaching the point in the 1982 and 2009

analogs when double-digit, multi-month

corrections occurred (chart right). Over

15 months after the 1982 low, the market

entered a 7.8-month cyclical bear. The

market endured a big correction in 2010

that failed to meet the bear criteria, but the

4/29/2011 - 10/3/2011 did.

Earnings: good news almost priced inIn the long run, the stock market tracks

earnings growth. Over the intermediate

term, the market anticipates changes in the

growth rate that result in counterintuitive

indicators. Stock market gains have

tended to be weaker when year-over-year

earnings growth has been higher than 20%

(chart left). If consensus estimates are anywhere close to correct, third quarter earnings growth will be at a level where the S&P 500 has historically risen at a paltry 2.4% annualized rate.

Above excerpted from: “All signs point to

weaker second half, except…” by Ed Clissold,

May 11, 2021


Market approaching when 2009 and 1982 rallies corrected



SSF21_18A_C

Dow Jones Industrial Average Around Market Bottoms



SSF21_18A_C

Dow Jones Industrial Average Around Market Bottoms

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

95

100

105

110

115

120

125

130

135

140

145

150

155

160

165

170

175

180

185

190

195

200

205

95

100

105

110

115

120

125

130

135

140

145

150

155

160

165

170

175

180

185

190

195

200

2051982-08-122009-03-092020-03-23

Source: S&P Dow Jones IndicesCyclical bear market bottom

Months Prior | Months Post

2009 case

1982 case

2020-present




Customized version of Customized version of S663S663

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

2

10

32

100

316

1,000

3,162

2

10

32

100

316

1,000

3,162

-100

-10

0

10

100

1,000

-100

-10

0

10

100

1,000

Source:Source: Ned Davis Research, Inc., S&P Dow Jones Indices

Earnings Growth High

Earnings Growth Low Source:Source: Ned Davis Research, Inc.

Monthly Data 1927-03-31 to 2021-12-31S&P 500 Index vs. GAAP Earnings Growth

DateDate4Q EPS 4Q EPS (3rd Clip)(3rd Clip)

Y/Y % ChangeY/Y % Change(2nd Clip)(2nd Clip)

12/31/2020 (A) $94.13 -32.5

03/31/2021 (E) $129.60 11.4

06/30/2021 (E) $151.61 52.8

09/30/2021 (E) $161.71 64.6

12/31/2021 (E) $175.36 86.3

Average P/E at Earnings Peaks (Down Arrows) = 13.88 Average P/E at Earnings Troughs (Up Arrows) = 25.68

Based on Earnings Reversals of 10%

S&P 500 Index Performance


Y/Y Earnings Growth

(Latest Actual):

% Gain/

Annum

% of

Time

Above 20 2.44 22.87

Between 5 and 20 6.44 31.16

Between -20 and 5 12.74 37.20

-20 and Below -9.76 8.77


S&P 500 Index (2021-04-30 = 4181.17)

Average PE * 12-Month Earnings (2021-04-30 = 2268.00)

Y/Y S&P 500 GAAP Earnings Growth (2021-12-31 = 86.30%)

By the time 20%+ EPS reported, most gains already made

M A Y 1 7 , 2 0 2 1 1 0P E R I O D I C A L | I S S U E : # M K T D G 2 0 2 1 0 5 1 7 | N D R . C O M Please see important disclosures at the end of this report.

1 0 | N E D D A V I S R E S E A R C H


Taxes — triple threat?President Biden laid out an ambitious

agenda during his first 100 days in office.

After signing the American Rescue Plan,

he has proposed the American Jobs

Plan and American Family Plan to boost

infrastructure spending and social spending.

Unlike the COVID relief bills, the latest two

proposals are accompanied by tax increases.

Specifically, they include higher corporate,

capital gains, and personal income tax

rates. Tax increases are rare: base tax rates

have been trending down for the past half

century as politicians and voters have grown

accustomed to deficit spending. Raising all

three simultaneously is even rarer. The only

meaningful hike was in 19421 (chart right).

Corporate taxesThe Biden administration is asking

corporations to pay for much of the

infrastructure spending, with the rationale

being that they will benefit from better

transportation and communication

networks. The headline is an increase in

the corporate tax rate from 21% to 28%,

reversing half of President Trump’s 2018 cut.

The table at left walks through the math

for what a 28% tax rate could mean for

S&P 500 earnings. The impact ranges

from 4.2% to 12.7%. At a 25% corporate tax

rate, a more palatable option proposed by

Senator Joe Manchin, would reduce S&P

500 earnings by 2.5% to 9.0%, all else being

equal. A perhaps more significant aspect

of the proposal is to double the minimum

tax on foreign earnings from 10.5% to

21%. Minimizing tax strategies that park

profits overseas could be an overlooked

aspect of the tax proposals that would hit

multinationals especially hard.

Concurrent corp, capital gains, and individual hikes rare



SSF21_17A_C

U.S. Corporate, Capital Gains, and Top Individual Tax Rates Yearly Data 1909-12-31 to 2020-12-31



SSF21_17A_C

U.S. Corporate, Capital Gains, and Top Individual Tax Rates Yearly Data 1909-12-31 to 2020-12-31

1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

05

10152025303540455055

05

10152025303540455055Corporate Tax Rate (2020-12-31 = 21.00%)

Source: www.irs.gov

Mean = 32.47

0

5

10

15

20

25

30

35

40

45

0

5

10

15

20

25

30

35

40

45Capital Gains Tax Rate (2020-12-31 = 23.80%)

Source: www.irs.gov

Mean = 21.29

10

20

30

40

50

60

70

80

90

100

10

20

30

40

50

60

70

80

90

100Top Individual Tax Rate (2020-12-31 = 37.00%)

Source: www.irs.gov

Mean = 57.68

Biden’s proposals

28% corp tax rate could lower aftertax profits by 4-13%Biden's Proposed 28% Corporate Tax Rate Impact on S&P 500 Aftertax Income

Tax Rate

Line Item

17.7% Effective (As of

12/31/2019)28% Stated

(Biden)

21.0% Effective (reverse 50% of

2018 effective cut)

Pretax Income per Share ($) 174.73 174.73 174.73

Income Taxes per Share (S) 30.67 48.92 36.69

Effective Tax Rate (%) 17.7 28.0 21.0

Change in Taxes per Share ($) 0.00 18.25 6.02

Aftertax Income per Share ($) 144.06 125.81 138.04

Change in Aftertax Income (%) 0.0 -12.7 -4.2

Source: S&P Capital IQ Compustat.

Ned Davis Research T_SSF21_17.1



Capital gains taxesTo fund the multitude of social programs in

the American Family Plan, Biden is turning

to the wealthiest Americans. One pillar is

to increase the top capital gains tax rate

from 23.8% to 43.4%. The table at right, first

published in October 2020, summarizes the

last four significant capital gains tax hikes.

The stock market’s reaction was mixed.

The macro backdrop enabled stocks to

overcome higher taxes in 2013 and 1987.

Higher taxes could accelerate the ongoing

shift from traditional mutual funds to ETFs,

since they often have lower tax liabilities.

The estate transfer rebase would be

repealed as well, altering the incentives of

what to leave to heirs, donate to charity, or

spend in the short term.

Individual income taxesThe second pillar to the American Family

Plan is to increase the tax rate for those

making over $400,000 from 37% to 39.6%,

as well as eliminate the carried interest

provision. Similar to capital gains hikes,

stock market returns were mixed around the

last four individual income tax hikes (table

left).

Above excerpted from: “Can stocks handle

so many tax hikes?” by Ed Clissold, May 6,

2021

Capital gains tax hikes have not occurred in a vacuumSummary of Four Most Recent Long-term Capital Gains Tax Hikes

Year

Previous Cap.

Gains %

New Cap.

Gains % Other Provisions Stocks Market Impact

2013 15.0 23.8

• Part of Affordable Care Act

• Signed in 2010, but didn't go into effect until 2013

• S&P 500 +29.6% in 2013 and 12.8% in 2010

• 16.0% drop after ACA signed, amid euro crisis

1987 20.0 28.0

• Ordinary income taxes lowered

• Real estate loss provisions eliminated

• October 1987 crash generally not attributed to capital gains taxes

• Ongoing secular bull market

1976 36.5 39.9• Increased holding period

for long-term from six months to one year

• S&P 500 entered 17-month, 19.4% decline shortly before bill signed

1969 27.5 36.5

• Capital gains rate increased annually until 1972

• Alternative minimum tax created

• Cyclical bear market for year before bill signed; bottomed five months later

• Series of short cyclical bulls and bears over next two years


Stock returns mixed after last four individual tax hikesSummary of Four Most Recent Top Marginal Income Tax Hikes

Year

Previous Top

Individual Rate %

New Top Individual

Rate % Other Provisions Stocks Market Impact

2013 35.0 39.6

• Part of Affordable Care Act

• Enacted in 2010, but didn't go into effect until 2013

• S&P 500 +29.6% in 2013 and 12.8% in 2010

• 16.0% drop after ACA signed, amid euro crisis

1993 31.0 39.6

• Raised corp rate 1% pt and effective cap gain rate 0.3% pts

• Raised fuel taxes

• S&P 500 up 7.1% in 1993• 8.9% drop Feb-Apr 1994

amid rate hikes

1991 28.0 31.0• AMT 21% to 24%• Capital gains capped

at 28%

• Shallow bear market July - Oct 1990; bill signed 11/5/1990

• Followed by 8-year cyclical bull market

1969 70.0 77.0

• Temporary income tax surcharge; max rate back to 70% in 1970

• Alternative minimum tax created

• Cyclical bear market for year before bill signed; bottomed five months later

• Series of short cyclical bulls and bears over next two years



M A Y 1 7 , 2 0 2 1

Key Takeaways

R O B A N D E R S O N , C F A I N V E S T M E N T R E S E A R C H A N A LY S T

M A R K E T D I G E S T U . S . S E C T O R S

• We downgraded Technology to underweight and upgraded Health Care to marketweight.

• Tech downgrade follows technical breakdown and sector model downgrade of the sector.

• All 11 sectors saw positive returns during the month of April.

While our recommended allocation to

Technology was already 2% points below

benchmark, on May 13, we reduced

exposure by an additional 1% to make

Technology an official underweight

recommendation. At that time, we added

the 1% to Health Care which upgraded the

sector to marketweight.

We made the position change for three main

reasons:

1. Sector model. The repositioning got

us more in line with the sector model’s

April downgrade of Technology to

underweight and March upgrade of

Health Care to marketweight.

2. Value vs. Growth. Value sectors

should continue to benefit relative

to Growth sectors as the economic

Downgraded Tech, upgraded Health Care

recovery progresses and the rotation

from COVID leaders to COVID laggards

continues.

3. Market cycle. An anticipated weaker

second half of the year should benefit

defensive sectors. The Health Care

upgrade follows our April 15 upgrade of

Utilities.

Technical breakdown We have noted Technology’s deteriorating

breadth in the last several Monthly Sector

Update publications. The sector’s short-term

50-Day Net New Highs indicator flipped to

bearish on February 25 and was confirmed

by the long-term 200-Day Breadth indicator

on March 22. Weak breadth can leave a

sector vulnerable to a price breakdown as

fewer issues are in position to keep the

sector moving higher. After trading mostly

sideways since last summer, Technology

went on a relative death cross (50-day

moving average fell below 200-day) in April

and broke below support in May (chart

above). A lack of technical support leaves Technology vulnerable to more relative underperformance and presents a favorable risk/reward opportunity at underweight.

Relative breakdown for Tech



ESS_1400_45

Information Technology Sector / S&P 500 Daily Data 2019-05-10 to 2021-05-12 (Log Scale)



ESS_1400_45

Information Technology Sector / S&P 500 Daily Data 2019-05-10 to 2021-05-12 (Log Scale)

2019Jun Jul Aug Sep Oct Nov Dec


2021Jan Feb Mar Apr May

148150151153154156158159161162164166167169171172174176178179181183185187189191192194196198200202204206209211213215217

148150151153154156158159161162164166167169171172174176178179181183185187189191192194196198200202204206209211213215217Information Technology Sector / S&P 500 (Cap-Weighted) 2021-05-12 = 192.06

--- 50-Day Moving Average 2021-05-12 = 201.39 --- 200-Day Moving Average 2021-05-12 = 205.69Source: S&P Capital IQ and MSCI, Inc. (GICS) , S&P Dow Jones Indices

Source: NDR Multi-Cap Institutional (Universe)



Mega headwindsThe unique nature of the COVID recession

led to a surge in the technology mega-cap

FANMAG group during the initial phases of

the recovery. The companies’ strong balance

sheets and ability to grow earnings despite

the pandemic helped the group rise by over

50% in 2020. The rotation away from COVID

leaders has been a negative for the tech

mega-caps in 2021. Apple and Microsoft,

which are combined 42.0% of Technology’s

market cap, have both underperformed

year-to-date. Microsoft went on a relative

death cross on December 2, and Apple

followed suit on May 3 (chart right). Since

1987, both companies have simultaneously

been on death cross signals 13% of the time,

making it a somewhat rare occurrence. The

sector has historically not performed well in

those cases.

Inflation headwindWhether or not massive fiscal spending

leads to problematic levels of inflation for

the stock market and the economy has

been frequently debated. Our macro team

has highlighted strong structural forces

that are both inflationary and disinflationary

and expects only a moderate pickup of CPI

inflation in 2021.

High levels of inflation have historically

been a negative for Growth sectors. As seen

in the chart at left, Technology has been

particularly weak when inflation has been

high. Partially due to base effects, Y/Y CPI

growth surged to 4.2% in April, its highest

level since 2008 and at a level consistent

with Technology underperformance.

Above excerpted from: “Downgrading

Technology, upgrading Health Care” by Rob

Anderson, May 13, 2021


Tech weak when Apple and Microsoft underperform



ESI4531A

Microsoft and Apple vs Technology Relative Strength Daily Data 2020-05-13 to 2021-05-12 (Log Scale)



ESI4531A

Microsoft and Apple vs Technology Relative Strength Daily Data 2020-05-13 to 2021-05-12 (Log Scale)

5152545556585960626365

5152545556585960626365S&P 500 Technology / S&P 500

50-Day Moving Average200-Day Moving Average


5.5

5.9

6.3

6.8

7.2

5.5

5.9

6.3

6.8

7.2Microsoft Corp. / S&P 50050-Day Moving Average200-Day Moving Average


May '2018 28

Jun '2008 17 26

Jul '2008 17 28

Aug '2006 17 26

Sep '2004 16 25

Oct '2006 15 26

Nov '2004 13 24

Dec '2004 15 24

Jan '2106 15 27

Feb '2105 17 26

Mar '2109 18 29

Apr '2108 19 28

May '2107

2.4

2.8

3.3

3.9

2.4

2.8

3.3

3.9

Apple Inc. / S&P 50050-Day Moving Average200-Day Moving Average


Full History Statistics since 1987-03-11

Performance WhenMSFT and AAPL Have:

Tech /S&P 500% Gain/Annum

% of Time

Both ST Averages Above LT 8.03 42.05

Mixed -0.32 44.97

* Both ST Averages Below LT -8.34 12.98

Inflation is a headwind for Tech



IF21_18A_C

Technology / S&P 500 vs. Y/Y CPI Growth Monthly Data 1972-01-31 to 2021-04-30 (Log Scale)



IF21_18A_C

Technology / S&P 500 vs. Y/Y CPI Growth Monthly Data 1972-01-31 to 2021-04-30 (Log Scale)

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

16

18

20

22

25

28

32

35

40

45

50

56

63

16

18

20

22

25

28

32

35

40

45

50

56

63

Technology vs. S&P 500Gain/Annum When:

CPI 12 Period Momentum % Gain/Annum

% ofTime

* Above 3.9 -3.55 32.84

Between 2.4 and 3.9 0.30 33.44

2.4 and Below 5.99 33.72


Technology vs. S&P 500 (2021-04-30 = 58.7)

-1.7-1.1-0.6-0.30.00.30.61.11.72.43.34.55.97.7

10.012.615.820.0

-1.7-1.1-0.6-0.30.00.30.61.11.72.43.34.55.97.7

10.012.615.820.0

High CPI Growth

Low CPI GrowthSource: Bureau of Labor Statistics

Y/Y CPI Growth (2021-04-30 = 4.2)




April sector performanceThe S&P 500 gained 5.2% in April, with all 11

sectors seeing positive returns during the

month (chart right). Sector leadership was

largely risk-on, with Real Estate finishing

as the top performing sector, and all three

defensive sectors underperforming the S&P

500 during the month. Energy, the best

performing sector in Q1, has been the worst

performing sector to begin Q2.

It is not too surprising that Energy

underperformed in April given that recent

outperformance has left the sector over 3.0

standard deviations overbought relative to

the S&P 500 on a six-month basis. However,

years of underperformance leave the sector

over 2.0 standard deviations oversold on a

relative five-year basis, and we maintain our

overweight position for now.

FANMAG breakout The FANMAG group broke out to new

highs in April, as all members other

than Netflix outperformed the S&P 500.

FANMAG, which had gotten over 3.0

standard deviations overbought relative

to the S&P 500 (252-day basis) in 2020,

has seen its relative return fall back to its

long-term average after underperforming

since early September (chart left). FANMAG

contributed over 2% points of the S&P 500’s

5.2% return in April.

Above excerpted from: “Monthly sector

update – May 2021” by Rob Anderson, May

5, 2021

Mixed Value and Growth leadership in April



BA552K

S&P 500 GICS Sector Monthly Performance (03/31/2021 - 04/30/2021)



BA552K

S&P 500 GICS Sector Monthly Performance (03/31/2021 - 04/30/2021)

Real Estate (0.20)

Communication Services (0.83)

Consumer Discretionary (0.88)

Financials (0.73)

Materials (0.14)

S&P 500 Index

Information Technology (1.39)

Utilities (0.11)

Health Care (0.50)

Industrials (0.31)

Consumer Staples (0.13)

Energy (0.01)

8.12%

7.64%

7.08%

6.41%

5.32%

5.24%

5.22%

4.23%

3.86%

3.55%

2.03%

0.46%

Source: S&P Dow Jones Indices•Returns excluding FANMAG stocksNumber in parenthesis after sector name indicates % point contribution to S&P 500 return

•3.26%

•2.19%

•0.67%

•3.2%

Relative returns back in line with long-term average



SP20201201B_C

FANMAG vs. S&P 500 ex-FANMAG Mean Reversion Daily Data 2018-12-31 to 2021-05-03 (Log Scale)



SP20201201B_C

FANMAG vs. S&P 500 ex-FANMAG Mean Reversion Daily Data 2018-12-31 to 2021-05-03 (Log Scale)



2021Jan Feb Mar Apr May

1.8

2.0

2.2

2.4

2.6

2.8

3.1

3.3

3.6

1.8

2.0

2.2

2.4

2.6

2.8

3.1

3.3

3.6FANMAG / S&P 500 ex-FANMAG

Source: S&P Dow Jones IndicesFANMAG = FB, AAPL, NFLX, MSFT, AMZN, GOOGL

-10-505

10152025303540455055606570758085

-10-505

10152025303540455055606570758085FANMAG 252-Day Period Rate of Change (61.6%) minus S&P 500 ex-FANMAG 252-Day Period Rate of Change (43.9%) 2021-05-03 = 17.7%

+1 SD

+2 SD

+3 SD

+4 SD

-1 SD

-2 SD

Mean



M A Y 1 7 , 2 0 2 1

Key Takeaways

• The bounce in FANMAG generated Tech Titan outperformance.

• Infrastructure ETFs continued to see positive money flow.

• We believe Biden spending plan and COVID reopening beneficiaries will outperform most tech-related themes this year.

Tech Titans benefited from FANMAG bounce

T H E M A T I C O P P O R T U N I T I E SM A R K E T D I G E S T

P A T T S C H O S I K , C F A , C M T, S E N I O R P O R T F O L I O S T R A T E G I S TM A T T B A U E R , C F A , S E N I O R R E S E A R C H A N A LY S T

The S&P 500 returned a very strong 5.2% in

April but breadth was not great. We estimate

the S&P 500 return in April would have

only been 3.2% excluding FANMAG stocks.

Accordingly, many themes that did not have

Tech Titan exposure underperformed.

Technical damageIt was actually startling to see just how

many thematic ETF portfolios experienced

a relative strength (vs S&P 500) “death

cross,” where the 50-day moving average

fell below the 200-day. Equal-weighted

themes within Technology (5G & IOT, AI &

Automation, E-commerce, Internet, Video

Games), FinTech (Broad FinTech, Mobile

Payments), and Demographics (Millennials,

Pet Care), all experienced a death cross in

April. The common thread across most of

the weakness is these themes did very well

into the peak of the pandemic. As stated

previously, we believe Technology and

“COVID winners” should lag the market as

the reopening trade takes center stage.

Infrastructure solidThe cap-weighted Infrastructure ETF

portfolio nearly outperformed — returning

4.6%. More impressive was to see nearly

$900 million flow into Infrastructure ETFs.

All four infrastructure ETFs we track are now

up more than 20% year-to-date. The Water

theme — another expected beneficiary of

Biden’s infrastructure spending plan — did

outperform, returning 5.5%.

Clean Energy weakAfter Cannabis (-7.0%), the Clean Energy

(-6.5%) and Global Clean Energy (-4.2%)

cap-weighted ETF portfolios were the worst

performers in April. Clean Energy continues

to decline like a bubble that has burst. We

like Clean Energy as a secular theme but will

be patient in looking for an entry point.

Above excerpted from: “Thematic update

May 2021” by Pat Tschosik and Matt Bauer,

May 5, 2021 (available through NDR’s new

Thematic Opportunities product offering)

Infrastructure and commodities stood out



TO_FLOWS_MTH

Top-15 ETF Asset Flows by Theme ($ mil.) for April 2021



TO_FLOWS_MTH

Top-15 ETF Asset Flows by Theme ($ mil.) for April 2021

ESG (5.1%)

Infrastructure (4.6%)

China Thematic (3.5%)

Global Clean Energy (-4.2%)

Global ESG (4.1%)

Global Natural Resources (4.5%)

AI & Automation (1.4%)

Benchmark (ACWI) (4.2%)

Blockchain (2.0%)

Healthcare Innovation (2.2%)

Battery Technology (8.8%)

Global Gold/Slvr Miners (5.6%)

Natural Resources (3.4%)

Scarce Resources - Water (5.5%)

Broad FinTech (5.2%)

1,033.5

885.3

767.9

485.1

384.8

274.4

203.6

198.2

185.3

168.9

163.4

158.1

132.7

117.8

116.9

Source: Ned Davis Research, Inc.

Numbers in parentheses after theme names aremonthly cap-weighted price returns


M A Y 1 7 , 2 0 2 1

Key Takeaways

A L E J A N D R A G R I N D A L S E N I O R I N T E R N A T I O N A L E C O N O M I S TP A T R I C K A Y E R S I N T E R N A T I O N A L E C O N O M I C A N A LY S T

M A R K E T D I G E S T G L O B A L E C O N O M I C S

Global economic growth continues to surge

• The global economy grew at its fastest pace in over a decade.

• Amid the vaccine rollouts, for the first time in eight months the services sector outpaced manufacturing.

• Demographics help explain the long-term disinflationary trends the developed world has experienced in recent decades.

According to the latest global Purchasing

Managers’ Indexes (PMI) data — which

provides one of the timeliest reads on the

world economy — the global economy grew

at its fastest pace in over a decade (chart

above). A pick up in vaccine rollouts which

has allowed for the reopening of economies,

ongoing monetary and fiscal stimulus, and

human resiliency and adaptability in the

face of the virus have allowed the global

economy to power ahead — despite the fact

that the COVID pandemic is not yet behind

us.

The global composite PMI — which includes

both the services and manufacturing

sectors — rose for a third straight month

in April to its highest level in 11 years. The

latest reading is historically consistent with

5.0% annual global GDP growth.

As the recovery picks up over the course of

this year due to a broadening of the vaccine

rollout — allowing pent-up demand to be

unleashed — our 6.1% global growth forecast

for the year appears highly achievable.

Manufacturing soarsGlobal manufacturing continued its path

of a strong V-shaped recovery. The global

manufacturing PMI also rose to its highest

level in 11 years (middle clip, chart above).

The global manufacturing PMI has risen in 11

of the past 12 months.

More and more countries joined the

manufacturing boom, as nearly 90% of the

world’s economies reported manufacturing

expansion, the largest share since February

2018 (top chart, next page).

Manufacturing growth was strongest in

Europe, led by northern European countries

— Sweden, Germany, and the Netherlands.

Manufacturing contracted only in Myanmar,

the Philippines, and Mexico.

Global composite PMI at highest level in 11 years!




IE250EIE250E

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

25

30

35

40

45

50

55

60

25

30

35

40

45

50

55

60

35

40

45

50

55

35

40

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50

55

20

25

30

35

40

45

50

55

60

20

25

30

35

40

45

50

55

60

Source:Source: IHS Markit PMI



Monthly Data 1998-07-31 to 2021-04-30Global Purchasing Manager Indexes

Shaded Areas Represent Contractions Based on

Peaks and Troughs of OECD Reference Series

Global Composite PMI (Seasonally Adjusted) (2021-04-30 = 56.33)

Global Manufacturing PMI (Seasonally Adjusted) (2021-04-30 = 55.82)

Global Services PMI (Seasonally Adjusted) (2021-04-30 = 56.57)

V-shaped recovery

Quickly catching up



Services soars too!Services rebounded robustly as the

reopening of some economies and the

anticipation of easing restrictions in the

coming months boosted the sector. The

services PMI jumped to its highest level

since July 2007. Moreover, the services

PMI reported a higher reading than the

manufacturing sector for the first time in

eight months.

But unlike the broad recovery in

manufacturing, the rebound in services has

been a bit narrower. The share of economies

with expanding services sectors was little

changed at 63% in April, and only half of

countries saw their PMIs increase from the

prior month.

Above excerpted from: “Global growth

surges amid vaccine rollouts” by Alejandra

Grindal, May 6, 2021


Demographics and inflationThe chart at left shows the historical

track record of inflation trends and the

dependency ratio in the U.S. You can

observe that the inflationary pressures

associated with the 1960s and 1970s

coincided with a rising dependency ratio

due to a large portion of young dependents

(i.e. Baby Boomers) at the time. But as the

Baby Boomers reached adulthood and

joined the labor force, we’ve seen both the

dependency ratio and inflation trends fall.

Numerous economists have recently

conducted analysis that, when holding

all else constant, has found the impact of

demographics on inflation is quite robust.

The premise is that when an economy has a

large working age population relative to the

rest of its population (i.e., a low dependency

ratio), long-term inflation pressures tend

to be lower. Conversely, when dependency




Customized version of Customized version of IE250BIE250B

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-10

-5

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100

-10

-5

0

5

10

15

20

25

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75

80

85

90

95

100

Source:Source: Haver Analytics

Monthly Data 1998-01-31 to 2021-04-30Breadth of Manufacturing Purchasing Managers' Indexes (PMI)

Shaded Areas Represent Contractions Based on

Peaks and Troughs of OECD Reference Series

Based on the individual economies listed in ICS_212.RPT

Share of PMIs Above 50 (2021-04-30 = 91.4%)

Strongest breadth since February 2018

Long-term relationship between dependency ratio and inflation




GO202104231A_CGO202104231A_C

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

Dependency Ratio = Ratio of population aged under 19 or 65-79 to population aged 20 to 64 Source:Source: Bureau of Labor Statistics, US Census Bureau

Yearly Data 1959-12-31 to 2025-12-31Inflation vs. Dependency RatioCPI Inflation (Scaled Left) (2020-12-31 = 1.2%)

Dependency Ratio (Advanced 5 Years, Scaled Right) (2025-12-31 = 0.64)




ratios are high, inflation pressures tend to be

greater.

There are a couple of reasons for this. The

first is just simply scarcity. When there is a

small labor market relative to dependents,

there are greater instances of worker

shortages. This bids up the price of labor,

and coupled with more employee bargaining

power, we see a subsequent pickup in

wages. These higher wages then ultimately

feed into final inflation.

Second, larger dependency ratios typically

imply less saving since dependents, almost

by definition, aren’t accruing income to

save. This, in turn, could eventually drive

up the natural interest rate. If central banks

keep nominal rates low, this could also fuel

inflation. Interestingly, the research finds

dependents ages 80 and over tend to have

a disinflationary effect due to hoarding of

savings.

Aging populations are also likely to see

increased demand for healthcare and

nursing home spending. These are usually

less productive industries, consequently

lowering the bar for potential growth and

leading to higher inflation pressures.

When looking at the dependency ratio

for G7 economies, the outlook could

presumably become inflationary in the next

two decades. This is because dependency

ratios will rise as those of the post-war baby

boom (which was observed throughout

the developed world) retire. The U.S., U.K.,

and Canada are projected to see a slightly

milder rise due to higher fertility rates, which

resulted in a larger pipeline of working-age

population.

It’s also important to note that even if

Developed market CPI has been subdued for several decadesMonthly 1/31/1985 - 2/28/2021

(IE704)

Overall CPI2/28/2021 = 1.7%

( )

Core CPI(ex-food and fuel)2/28/2021 = 1.6%

( )

Source: OECD, Main Economic Indicator (MEI), www.oecd.org-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

3.0

3.3

3.6

3.9

4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

6.6

6.9

7.2

7.5

7.8

8.1

8.4

8.7

9.0

9.3

9.6

9.9

10.2

10.5

10.8

11.1

11.4

11.7

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

3.0

3.3

3.6

3.9

4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

6.6

6.9

7.2

7.5

7.8

8.1

8.4

8.7

9.0

9.3

9.6

9.9

10.2

10.5

10.8

11.1

11.4

11.7

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

OECD Area CPI and Core CPI (Year-to-Year Changes)

Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

©

demographic factors do indeed end up

being inflationary, they could still be offset

by other disinflationary forces. As shown in

the chart below, inflation at the core level in

the developed world has remained subdued

for several decades.

Other disinflationary forces include negative

output gaps, globalization, technology,

high private debt, and anchored inflation

expectations. With this in mind, we continue to maintain our view that long-term inflation trends in the developed world will likely remain anchored.

Above excerpted from: “Understanding

the link between demographics and

inflation” by Alejandra Grindal, April 23, 2021

Interested in customizing these insights?

Learn more about our

Custom Research Solutions

www.ndr.com/custom-research



U.S. inflation stands outSeveral developed and emerging markets

have begun reporting April 2021 CPI data.

Nearly all saw prices pop up, but none as

markedly as the U.S. As shown in the chart

at right, U.S. annual CPI growth surged 4.2%,

the most since 2008, while the core rate

accelerated to the greatest since 1996. The

inflation rate also picked up among several

eurozone countries, but only to their highest

levels since before COVID. Conversely,

China’s inflation has been relatively subdued.

This puts the U.S. inflation rate not far from

that of emerging markets such as Brazil

and Russia, whose central banks have had

to raise rates in recent months to counter

inflation pressures.

Stimulus leaderThe U.S. is in a unique position because

of its faster growth, due in part to the

successful vaccine rollout, but also because

of its outsized fiscal stimulus. COVID

fiscal support stacked up similarly among

developed economies in 2020, as seen in

the chart at left. But the American Rescue

Plan now puts the U.S. significantly ahead

of the rest of the world, making the U.S. the

leader in global growth. The greater stimulus

suggests larger demand pressures and

may also be contributing to labor supply

shortages. This, however, will likely be

temporary given the one-off nature of the

support.

As discussed in the U.S. Fixed Income

section of this report, we’ll continue to

watch inflation expectations and wage

developments closely for signs if this will

become an entrenched issue.

Above excerpted from: “Why U.S. inflation

stands out compared to the rest of the

world” by Alejandra Grindal, May 13, 2021

U.S. CPI surged more than many other economies



ICS_203.RPT

Consumer Price Measures by Economy (Year-to-Year % Change) 2021-05-13



ICS_203.RPT

Consumer Price Measures by Economy (Year-to-Year % Change) 2021-05-13

ChinaIta

ly

France

Germany

South Korea

United States

Russia

Brazil

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

7.00

7.25

7.50

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

7.00

7.25

7.50

Chart reflects latest data point available for each seriesSource: Haver Analytics

U.S. is taking the fiscal lead in 2021


M A Y 1 7 , 2 0 2 1

Key Takeaways

J O S E P H F . K A L I S H C H I E F G L O B A L M A C R O S T R A T E G I S TV E N E T A D I M I T R O V A S E N I O R U . S . E C O N O M I S T

M A R K E T D I G E S T U . S . F I X E D I N C O M E

Inflation expectations nearing a breakout

• Market-based measures of inflation expectations are nearing key levels.

• Credit is expensive on an historical basis, as fundamentals remain compelling and the economy recovers.

• Credit quality has deteriorated within investment grade (IG) but has improved for high yield (HY). We continue to favor HY over IG.

The first quarter of 2021 was the worst

quarter for the Bloomberg Barclays U.S.

Aggregate Index since Q3 1981. The yield

on the 10-year Treasury soared from under

1.00% at the start of the year to as much

as 1.765% near the end of the quarter.

Optimism about the vaccine rollout pushed

up expectations for growth and inflation as

the economy reopened. At the same time,

massive fiscal and generous monetary

support boosted yields. After such a large

run-up, it’s not unusual for a market to take

a breather.

Inflation expectations are critical for bonds.

We have identified three indicators we

are watching to see if the inflation spike

will be more than transitory. Currently, we

are watching for a breakout in long-term

market-based inflation expectations. Today,

those are on the cusp of breaking out, as

shown on the chart above. The 5-year/5-

year forward breakeven rate is close to our

threshold of 2.4%. Similarly, the 5-year/5-year

inflation swap rate is just under our 2.6%

level. We are also watching the 5-year/5-

year euro swap rate, which moved out to

a new cycle high, indicating rising inflation

expectations in the Eurozone.

On an intermediate-term basis, we are

watching the shelter component of inflation.

Led by a record monthly gain in lodging last

month, shelter has turned up.

Longer-term, we need to see broad-

based compensation gains. So far, worker

shortages and strong demand (as seen in

record job openings) have not materially

affected compensation.

Above excerpted from: “Bond market

taking a breather” and “Inflation

expectations on the cusp of breakout” by

Joe Kalish on April 20, 2021 and May 13,

2021, respectively

On cusp of breaking above prior highs



B781




B781


0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.005-Year / 5-Year Inflation Swap 2021-05-11 = 2.55% Mean = 2.63%5-Year Implied Forward Inflation 2021-05-11 = 2.38% Mean = 2.24%

Source: Federal Reserve Board, Bloomberg Finance L.P.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-0.250.000.250.500.751.001.251.501.752.002.252.502.753.00

-0.250.000.250.500.751.001.251.501.752.002.252.502.753.00

Inflation Swap minus Forward Inflation 2021-05-11 = 0.17% Mean = 0.39%




Corporate credit is expensiveInvestment grade and high yield

corporate credit have been on a tear over

the past 12 months. Investment grade has

returned 4.5%, while high yield has soared

19.7%, compared with a loss of 0.3% for the

Bloomberg Barclays U.S. Aggregate Float

Adjusted Index.

Spreads have collapsed over that

time (chart right). Investment grade has

narrowed by 114 basis points (1.14%) to

88 basis points (0.88%). High yield has

compressed by 453 basis points to 291 basis

points. As a result, excess returns remain

positive but have started to fade.

The moves make sense. Fundamentals remain compelling. The financial markets

are awash in liquidity. Credit indexes, such

as the one from the NACM, are improving,

as the economy recovers. Many companies

have taken the opportunity to refinance

their debt at lower rates and longer

maturities, thereby reducing default risk.

Furthermore, as business improves, more

companies should be upgraded.

But market structure also plays a role. The

last time both monthly spreads were this

low was in February 2007. Since then credit

quality has deteriorated within investment

grade while it has improved for high yield

(table left).

Credit spreads historically tight




Customized version of Customized version of B368B368

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

0

50

100

150

200

250

300

350

400

450

500

550

600

0

50

100

150

200

250

300

350

400

450

500

550

600

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Mean = 132Mean

Source:Source: Bloomberg Barclays Indices

Mean = 543Mean


Weekly Data 1989-07-07 to 2021-04-30OAS on Agencies, Mortgages, Corporates, and High Yield

OAS = Option-Adjusted Spread

U.S. Investment-Grade Corporate Credit (2021-04-30 = 88 bps)

U.S. High Yield (2021-04-30 = 293 bps)

Credit Rating

Change in Share

Aaa -2.9

Aa -14.6

A 1.0

Baa 16.6

Ba 18.5

B -13.9

Caa -4.1

Ca/D -0.3




Spreads by credit quality have behaved

similarly over time. Using aggregate spreads

for investment grade and high yield can be

misleading due to compositional shifts.

Over 50% of high yield is comprised of Ba,

the top tier in that segment, while over

half of investment grade is Baa. Yet the

difference in OAS between Ba and Baa is

currently 105 bp. In February 2007 it was 78

bp. At the same time, the Baa duration is 1.75

years longer, while the Ba duration is similar.

As a result, the spread/duration is smaller

for Baa and larger for Ba compared to 2007,

making Ba the better relative value. We

continue to favor HY over IG.

Above excerpted from: “Is corporate credit

really expensive?” by Joe Kalish, May 4, 2021

IG now weighted more toward Baa




Customized version of Customized version of B384JB384J

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

0

200

400

600

0

200

400

600

0

100

200

300

400

0

100

200

300

400

0

100

200

300

400

500

0

100

200

300

400

500

0

200

400

600

0

200

400

600

Mean = 86.3+2 SD

+4 SD

+6 SD

+8 SD

+10 SD

+12 SD

Mean


Mean = 109.8

+2 SD

+4 SD

+6 SD

Mean


Mean = 147.8+1 SD

+2 SD

+3 SD

+4 SD

+5 SD

+6 SD

-1 SD

Mean


Mean = 212.2+1 SD

+2 SD

+3 SD

+4 SD

+5 SD

+6 SD

-1 SD

-2 SD

Mean


Daily Data 1989-06-30 to 2021-04-30OAS for U.S. Investment Grade Corporates by Credit Quality

OAS = Option-Adjusted Spread (in Basis Points)

AAA (2021-04-30 = 46 bps)

AA (2021-04-30 = 51 bps)

A (2021-04-30 = 69 bps)

BAA (2021-04-30 = 109 bps)




Customized version of Customized version of B384KB384K

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0

200

400

600

800

1,000

1,200

0

200

400

600

800

1,000

1,200

0

500

1,000

1,500

0

500

1,000

1,500

500

1,000

1,500

2,000

2,500

500

1,000

1,500

2,000

2,500

0

2,000

4,000

6,000

8,000

0

2,000

4,000

6,000

8,000

Mean = 388.8+1 SD

+2 SD

+3 SD

+4 SD

+5 SD

+6 SD

-1 SD

Mean


Mean = 541.3+1 SD

+2 SD

+3 SD

+4 SD

+5 SD

+6 SD

-1 SD

Mean


Mean = 915.1+1 SD

+2 SD

+3 SD

+4 SD

+5 SD

-1 SD

Mean


Mean = 2,391.0+1 SD

+2 SD

+3 SD

+4 SD

+5 SD

-1 SD

-2 SD

Mean


Daily Data 2000-08-15 to 2021-04-30OAS for U.S. High Yield Corporates by Credit Quality

OAS = Option-Adjusted Spread

BA (2021-04-30 = 214 bps)

B (2021-04-30 = 320 bps)

CAA (2021-04-30 = 501 bps)

CA-D (2021-04-30 = 1575 bps)

HY now weighted more toward Ba


M A Y 1 7 , 2 0 2 1

Key Takeaways

V E N E T A D I M I T R O V A S E N I O R U . S . E C O N O M I S TJ O S E P H F . K A L I S H C H I E F G L O B A L M A C R O S T R A T E G I S T

M A R K E T D I G E S T U . S . E C O N O M I C S

• With a big shortfall in the latest employment report, a Fed taper might not occur until next year.

• CPI inflation surges, but productivity gains cap ULC growth.

• CRE returns have stabilized but vary by property type.

When will the Fed taper?After the horrendous miss on the April

employment report, economists have

proffered several reasons including the

following:

1. As more businesses opened back up,

fewer pandemic workers were needed.

2. Chip shortages and supply chain

disruptions helped explain the 18,000

decline in manufacturing,

3. Childcare kept women from returning to

work, as some schools remained closed.

4. More people retiring early. With stocks

and housing prices at record highs,

the increase in wealth means a greater

number of older people can afford to

retire early.

5. Mismatches between jobs and

unemployed due to skills, geography,

and demography.

6. Strong seasonal adjustments. We don’t

agree with this one.

7. Cautious response. Business owners

may be taking a wait-and-see approach

on how well demand returns.

8. Continued fear over getting COVID-19.

With vaccination rates slowing, the U.S.

may not achieve herd immunity, causing

some potential workers to stay away.

All of these factors could weigh on monetary

policy. The Fed has been very clear about

what it needs to see to raise interest rates,

but have been deliberately vague about

what it needs to taper its asset purchases

and defining “substantial further progress.”

Our base case is that the Fed will announce its taper between the Jackson Hole Symposium and the November 2-3 FOMC meeting. The taper will begin in January 2022.

Above excerpted from: “Will the Fed

announce its tapering next year?” by Joe

Kalish and Veneta Dimitrova, May 11, 2021

Employment shortfall, inflation fearsUnemployment rates making progress

Monthly 1/31/1994 - 4/30/2021

(E838B)

Unemployment Rate4/30/2021 = 6.1%

Scale Right( )

4

5

6

7

8

9

10

11

12

13

14U6 Unemployment Rate

Total Unemployed, Plus all Marginally Attached Workers,Plus Total Employed Part Time for Economic Reasons,

as a Percentof the Civilian Labor ForcePlus all Marginally Attached Workers

4/30/2021 = 10.4%Scale Left

( )

Correlation Coefficient = 0.98Source: Bureau of Labor Statistics7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

4/30/2021 = 4.3%

3.0

3.3

3.6

3.9

4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

6.6

6.9

7.2

7.5

7.8

8.1

3.0

3.3

3.6

3.9

4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

6.6

6.9

7.2

7.5

7.8

8.1

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Unemployment Rate vs U6

U6 minus Unemployment Rate Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

.www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at ©



Consumer price inflation surgesWhile the directional change in consumer

prices in April was broadly expected by

economists, the magnitude of the increase

was well above expectations. A confluence

of goods shortages and bottlenecks related

to COVID supply chain issues and a demand

surge from the reopening of the economy

drove the Consumer Price Index (CPI) up

0.8% (chart right), the biggest gain since

June 2009, and far above the consensus of

0.2%.

Above excerpted from: “Big surge

in consumer price inflation” by Veneta

Dimitrova, May 12, 2021

Productivity vs. labor costsStronger productivity gains cap unit

labor costs (ULC) growth, which should

hold down inflation pressures. Nonfarm

productivity rebounded at a 5.4% annual rate

in Q1 (chart left), above the consensus of

4.4%. It was the biggest gain in productivity

since Q4 2009, excluding the surge in Q2

2020 after the pandemic lockdown.

ULC fell at a 0.3% annual rate, as the

productivity gain for the quarter exceeded

hourly compensation growth.

An increase in infrastructure investment,

as proposed by the Biden administration,

could lift productivity growth and potential

output growth, effectively creating a longer

runway for the economy to expand without

excessive inflation pressures.

Above excerpted from: “Productivity

growth up, unit labor costs down” by Veneta


M A R K E T D I G E S T U . S . E C O N O M I C S

1/3 of the surge driven by higher vehicle pricesMonthly 1/31/1982 - 4/30/2021

(E0714)

4/30/2021 = 0.770%12-Month Smoothing4/30/2021 = 0.340%

( )

Source: All data from Bureau of Labor Statistics

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

4/30/2021 = 0.917%

12-Month Smoothing4/30/2021 = 0.244%

( )

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1985 1990 1995 2000 2005 2010 2015 2020

CPI (Monthly % Change)

Core CPI (Monthly % Change) Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

.www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at ©

Productivity gains cap ULC growthQuarterly 6/30/1947 - 3/31/2021

(E746A)

Nonfarm Productivity 3/31/2021 = 5.4%

-9

-6

-3

0

3

6

9

12

15

18

-9

-6

-3

0

3

6

9

12

15

18

Nonfarm Output 3/31/2021 = 8.4%

-30

-20

-10

0

10

20

30

40

-30

-20

-10

0

10

20

30

40

Nonfarm Hours 3/31/2021 = 2.9%

-40-35-30-25-20-15-10

-505

10152025303540

-40-35-30-25-20-15-10

-505

10152025303540

Source: Bureau of Labor Statistics

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Nonfarm Productivity and Its Components (Annualized Quarterly Change)


©



Q1 GDP growth acceleratedThe economic recovery accelerated in Q1,

amid a successful vaccine rollout, easing of

COVID restrictions, and more fiscal support.

Both manufacturing and services activity

strengthened. Housing and auto sales

boomed. Layoff s eased but labor market

slack is still very large.

Positives• Large fiscal stimulus and

accommodative Fed continue to

support the economy.

• Falling COVID case counts drive

services. Manufacturing strength drives

capex.

• Stimulus checks and low interest rates

boost consumer demand. High saving

rate should fuel future spending.

Negatives• Supply chain issues leading to

shortages and production bottlenecks.

• COVID resurgence in other parts of the

world limiting travel and trade.

• Labor force participation and

employment/population ratio still very

low.

Above excerpted from: “Where the U.S.

economy stands in Q1 2021” by Veneta


Where the U.S. economy stands in Q1 2021

Page 2 – Latest Trends

• Supply chain issues leading to shortages and production bottlenecks.

• COVID resurgence in other parts of the world limiting travel and trade.

• Labor force participation and employment/population ratio still very low.

• Large fiscal stimulus and accommodative Fed continue to support the economy.

• Falling COVID case counts drive services. Manufacturing strength drives capex.

• Stimulus checks and low interest rates boost consumer demand. High saving rate should fuel future spending.

POSITIVESOVERALL CYCLE NEGATIVES

Fiscal Policy

Monetary Policy

Commercial Real Estate

The four phases of the economic cycleand the current status of 12 economic sub-cycles

BEC_US202105041

The economic recovery accelerated in Q1, amid a successful vaccine rollout, easing of COVID restrictions, and more fiscal support. Both manufacturing and services activity strengthened. Housing and auto sales boomed. Layo�s eased but labor market slack is still very large.

Early expansion

GROWTH PEAKING GROWTH SLOWING

CONTRACTIONEXPANSION

Demographics

Credit

Energy

Labor

Capital Spending

Profits

Trade and Current Account

Housing

Autos

© Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without priorpermission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html.


Lorem ipsum

Where the U.S. economy stands in Q1 2021

Page 2 – Latest Trends

• Supply chain issues leading to shortages and production bottlenecks.

• COVID resurgence in other parts of the world limiting travel and trade.

• Labor force participation and employment/population ratio still very low.

• Large fiscal stimulus and accommodative Fed continue to support the economy.

• Falling COVID case counts drive services. Manufacturing strength drives capex.

• Stimulus checks and low interest rates boost consumer demand. High saving rate should fuel future spending.

POSITIVESOVERALL CYCLE NEGATIVES

Fiscal Policy

Monetary Policy

Commercial Real Estate

The four phases of the economic cycleand the current status of 12 economic sub-cycles

BEC_US202105041

The economic recovery accelerated in Q1, amid a successful vaccine rollout, easing of COVID restrictions, and more fiscal support. Both manufacturing and services activity strengthened. Housing and auto sales boomed. Layo�s eased but labor market slack is still very large.

Early expansion

GROWTH PEAKING GROWTH SLOWING

CONTRACTIONEXPANSION

Demographics

Credit

Energy

Labor

Capital Spending

Profits

Trade and Current Account

Housing

Autos

© Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without priorpermission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html.


Lorem ipsum



Commercial real estate stabilizesWith the economy continuing to

recover from COVID-19 and its related

shutdowns, several positive signs are

emerging in the outlook for commercial real

estate — transactions, confidence, and new

construction are all rebounding from the

pandemic lows. And financing conditions are

expected to improve. We believe the worst is over for the sector.

The NCREIF Property Index (NPI) gained

1.7% in Q1, an improvement over Q4’s 1.2%

increase and the third consecutive gain,

as shown on the chart below. Income

accounted for 60% of the return. Returns

weren’t as good as stocks but were much

better than bonds.

CoStar reported its composite price indexes

were flat to down. The value-weighted

index, which reflects the larger asset sales in

core markets and is closest to the NCREIF

data, fell 1.2% in Q1. Nevertheless, the index

remains well above its pre-pandemic levels

and is up 5.9% from a year ago. The equal-

weighted index and its components were

little changed.

Returns varied by property type. Industrial

continued to lead the way, gaining

4.7%, according to NCREIF. Apartments

performed nicely, gaining 1.7%, amid a severe

shortage of housing units. Office generated

a positive return of 1.0%. But structurally

challenged Retail and Hotel continued to

lose ground, albeit at slower rates.

CoStar also reported gains for Industrial

and Multifamily, but recorded gains for

their Retail and Land indexes too in Q1.

Retail advanced 2.3% and Land surged by

Commercial real estate continues its recovery

(E532N)

Quarterly 3/31/1978 - 3/31/2021

NCREIF Property Index 3/31/2021 = 1.7%Mean = 2.2%

Source: NCREIF.com-7-6-5-4-3-2-101234567

-7-6-5-4-3-2-101234567

S&P 500 Total Return Index 3/31/2021 = 6.2%Mean = 3.2%

Source: Standard & Poor's-20

-16

-12

-8

-4

0

4

8

12

16

20

-20

-16

-12

-8

-4

0

4

8

12

16

20

Barclays U.S. Aggregate Total Return Index

3/31/2021 = -3.4%

Mean = 1.8%

Source: Barclays

Correlation Matrix

NCREIF STOCKS BONDSNCREIF 1. 00STOCKS 0. 07 1.00BONDS -0. 11 0.11 1.00

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

NCREIF Property Index vs Stocks and Bonds (Quarterly Returns)


©

3.3%. Office and Hospitality declined 0.7%

and 4.9%, respectively. CoStar noted that

compared to a year ago, Hospitality was

the only sector to show a loss, down 10%.

Multifamily led the way with an increase of

10.2%.

We remain overweight Industrial and

underweight Retail.

Above excerpted from: “Is the worst

over for CRE?” by Joe Kalish and Veneta


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www.ndr.com


M A Y 1 7 , 2 0 2 1

Key Takeaways

N E D D A V I S S E N I O R I N V E S T M E N T S T R A T E G I S T

M A R K E T D I G E S T N D R H O T L I N E

Commodity bull market

• The NDR Commodity Model remains bullish.

• Commodity model is confirmed by solid breadth, ISM manufacturing commodity survey, and economic surprises.

• Global stocks remain mostly bullish, but with a slight loss of momentum — what that can mean for the U.S.

Commodity model bullish The NDR Commodity Model remains

on a buy signal from last November for

commodity prices (chart above). Both the

internal and external indicators in the model

are solidly bullish, producing an overall

90.2% bullish reading.

Because everyone wants to know if these

bullish commodity moves will lead to overall

sustained inflation, I am checking a lot of

indicators on commodities to see if they

confirm our model or not. So far, I am in

the transitory inflation camp, but these

indicators look pretty solid for now.

Confirmed by solid breadth To measure commodity breadth, we can

look at 17 different commodities daily.

When above 50% bullish, the indicator has

clear bullish tendencies since 2004. The

commodity bull market has good breadth.

Positive economic surprisesFor an external indicator, I am watching

global economic surprises. High commodity

prices often bring lower prices as miners,

drillers, farmers, etc., jump to produce more

at the higher prices, so secular moves up

are rare, but they can happen. In any case,

the cyclical bull market looks to continue for

now, thanks to the Fed and central banks

globally.

Global stocks remain bullishGlobal stock trends are obviously important

if you invest globally, but they are also

good to confirm trends in the U.S. Looking

at 50 global markets on an intermediate-

term basis and our Global Big Mo Tape

Composite, trends remain bullish — but

momentum is weakening. I would need to

see more weakness to get concerned.

Above excerpted from: “Update on

commodity bull market trends and global

stock momentum” by Ned Davis, May 10,

2021 (available through the NDR Hotline

product offering)

Commodity model bullish




AA800AA800

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

1,000

3,162

10,000

1,000

3,162

10,000

0

50

100

0

50

100

0

50

100

0

50

100

0

50

100

0

50

100

Source:Source: S&P GSCI




Monthly Data 1986-01-31 to 2021-04-30S&P GSCI vs. NDR Commodity Model -- Real Time Since 7/31/2009

S&P GSCI Performance


NDR Commodity Composite

Model:

% Gain/

Annum

% of

Time

Above 67.0 22.99 38.51

45.0 - 67.0 7.17 33.83

Below 45.0 -22.50 27.66


SPGSCI Total Return Index (2021-04-30 = 2,429.59)

Internal Model (2021-04-30 = 87.5%)

External Model (2021-04-30 = 92.9%)

Composite Model (50% Internal, 50% External) (2021-04-30 = 90.2%)



M A R K E T D I G E S T G L O S S A R Y

Asset Allocation: Ned Davis Research, Inc. constrains the recommended equity weighting (which can theoretically range from zero to 100%) to be limited to a minimum of 40% stocks and a maximum of 70% stocks. Due to the constraint on equity weighting, the combination of bonds and cash can be weighted no greater than 60% and no less than 30% in NDR’s recommendations. The benchmark for bond allocation is 35% and for cash is 10%.

Benchmark Duration: The most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio should be to changes in interest rates. Point of reference for a measurement.

Beta: A number describing the relation of an investment return with that of the financial market as a whole. Numbers greater than one suggest an investment will increase more than the broad market when it is rising, and have greater declines when the market is falling.

Breadth: A technical term used to demonstrate how broadly a market is moving.

Capital Market: Is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds.

Commercial Mortgage-Backed Securities (CMBS): A type of mortgage-backed security backed by commercial mortgages rather than residential mortgages. When compared to a residential mortgage-backed security, a CMBS provides a lower degree of prepayment risk because commercial mortgages are most often set for a fixed term.

Core Inflation: Is a measure of inflation which excludes certain items that face volatile price movements, notably: food and energy.

Cyclical Bear: Cyclical swings in the market can last from several months to a few years, and are designed to be in line with the primary trend. A cyclical bear market is a cyclical swing when the market is in a downtrend.

Cyclical Bull: Cyclical swings in the market can last from several months to a few years, and are designed to be in line with the primary trend. A cyclical bull market is a cyclical swing when the market is in an uptrend.

Deflation: Is a slight decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls but stays above 0%.

Demographics: Studies of population based on factors such as age, race, sex, economic status, level of education, income level, and employment.

Echo Bull/Bear: An echo bear market is a shallower correction which occurs in the equity market that does not coincide with an economic recession. An echo bull market is one that follows and echo bear market.

European Central Bank (ECB): Is the institution of the European Union (EU) which administers the monetary policy of the EU Eurozone member states. It is thus one of the world’s most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany.

Eurozone/European Union: Is an economic and monetary union (EMU) of the European Union (EU) member states which have adopted the euro currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Glossary of terms



Glossary of terms

Federal Open Market Committee (FOMC): A component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations. It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply.

Gross Domestic Product (GDP): The total output of goods and services produced in a given country during a given period.

Lagging Indicator: An economic factor that changes after the economy has already begun to follow a particular pattern or trend; used to confirm long-term trends.

Leading Indicator: An economic factor that changes before the economy starts to follow a particular pattern or trend; used to predict changes in the economy.

Median P/E: Numeric value separating the higher half of a sample, a population, or a probability distribution, from the lower half. This is the middle price-to-earnings ratio of a series.

Mortgage-Backed Securities (MBS): A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency.

MSCI Emerging Market Index: An index developed by Morgan Stanley Capital International, Inc. (MSCI) as an equity benchmark for emerging market stock performance. It is a capitalization-weighted index that aims to capture 85% of publicly available total market capitalization. Component companies are adjusted for available float.

M A R K E T D I G E S T G L O S S A R Y

NDR HOUSE VIEWS (Updated May 13 , 2021)

NDR recommends maximum overweight allocation to equities, underweight allocation to bonds and marketweight allocation to cash. It is likely that we have seen a reset of the secular bull market that started in 2009.

Equity Allocation

U.S. | We are marketweight the U.S. relative to other regions

but are bullish on an absolute basis. The rally from the March

23 low has met the NDR criteria for a cyclical bull market, and

we are shifting to risk-on assets as models confirm. We favor

small-caps over large-caps and Value over Growth.

INTERNATIONAL | We are overweight Europe ex. U.K. and

Japan, underweight U.K. and Pacific ex. Japan, and neutral on

all other regions within our seven-way regional allocation

framework.

Macro

ECONOMY | The global economy fell into its deepest

recession in the postwar era due to COVID-19, but pent-up

demand and robust stimulus is setting the stage for a strong

rebound in growth in 2021. Inflation will jump in the short-term,

but long-term trends are anchored.

FIXED INCOME | We are 85% of benchmark duration. We are

positioned for a steeper yield curve. We are overweight MBS,

ABS, HY corporates, EM, and TIPS. We are underweight

Treasurys.

GOLD | Long-term uptrend intact. We are bullish.

DOLLAR | Our long-term technical composite is negative. We

are bearish.

Overweight Marketweight Underweight

Near term activity: Accelerating Neutral Decelerating

Global Asset Allocation

Stocks (70%)

Cash (10%)

Bonds (20%)

Benchmark: Stocks (55%), Bonds (35%), Cash (10%)

Equities — Regional Relative Allocation

Europe ex. U.K. (15%) | Japan (8%)

U.S. (57%) | Emerging Markets (13%) | Canada (3%)

U.K. (2%) | Pacific ex. Japan (2%)

Benchmark – U.S. (57.9%), Europe ex. U.K. (13%), Emerging Markets (12.7%), Japan (6.8%), U.K. (3.8%), Pacific ex. Japan (3.1%), Canada (2.7%)

Global Bond Allocation

Europe (33%)

Japan (17%) | U.K. (5%)

U.S. (45%)

Benchmark: U.S. (50%), Europe (28%), Japan (16%), U.K. (6%)

U.S. AllocationStocks (70%) | Small-Cap | Value

Mid-Cap | Cash (10%)

Bonds (20%) | Large-Cap | Growth

Benchmark: Stocks (55%), Bonds (35%), Cash (10%)

Sectors

Financials (13%) | Industrials (12%) | Energy (4%)

Technology (24%) | Consumer Staples (5%)

Benchmark: Technology (27.0%), Health Care (13.5%), Financials (10.0%), Communication Services (11.1%), Consumer Discretionary (12.5%), Consumer Staples (7.3%), Industrials (8.3%), Energy (2.4%), Utilities (2.8%), Real Estate (2.5%), Materials (2.6%)

U.S. Bonds — 85% of Benchmark Duration

Global Economy(6.1%)

U.S. Economy(6.5%-7.0%)

U.S. Inflation(2.2%)

Economic gauges reflect changes in near-term economic activity. Numbers in parenthesis refer to NDR 2021 forecasts.

Economic Summary May 10, 2021


M A R K E T D I G E S T

VENICE2520 North Tamiami TrailNokomis, FL 34275(941) 412-2300

NEW YORK1120 Avenue of the Americas6th FloorNew York, NY 10036(646) 810-7270

MONTREAL1002 Shebrooke St. W.Suite 1600Montreal, Canada H3A 3L6

LONDON8 Bouverie StreetTemple, LondonEC4Y 8AX+44 (0) 20 7779-8682

HONG KONG12/F, V-Point, 18 Tang Lung Street, Causeway BayHong Kong+852 3416 6676

AUSTRALIA19/1 O’Connell StreetSydney, Australia+61282491867

NED DAVIS RESEARCH

[email protected](800) 241-0621

Important Information and DisclaimersNDR (Ned Davis Research) uses the weight of the evidence and a 360-degree approach to build up to market insights. When we say “evidence,” we mean processing millions of data series to fuel a historical perspective, build proprietary indicators and models, and calm investors in a world full of bull/bear news hype and hysteria. We believe that no client is too big or too small to benefit from NDR’s insights.

The data and analysis contained in NDR’s publications are provided “as is” and without warranty of any kind, either expressed or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.

NDR’s reports reflect opinions of our analysts as of the date of each report, and they will not necessarily be updated as views or information change. All opinions expressed therein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. NDR or its aff iliated companies or their respective shareholders, directors, off icers and/or employees, may have long or short positions in the securities discussed in NDR’s publications and may purchase or sell such securities without notice.

NDR uses and has historically used various methods to evaluate investments which may, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior NDR recommendations or NDR performance rankings, one should also consider that NDR may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse eff ect of transaction costs or management fees or reflect actual investment results, that other less successful recommendations made by NDR are not included with these model performance reports, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. Unless specifically noted on a chart, report, or other device, all performance measures are purely hypothetical, and are the results of back-tested methodologies using data and analysis over time periods that pre-dated the creation of the analysis and do not reflect tax consequences, execution, commissions, and other trading costs. For these and for many other reasons, the performance of NDR’s past recommendations and model results are not a guarantee of future results.

Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many diff iculties and their eff ectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the eff ectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider diff ering viewpoints and use a weight of the evidence approach that fits their investment needs. Any particular piece of content or commentary may or may not be representative of the NDR House View, and may not align with any of the other content or commentary that is provided in the service. Performance measures on any chart or report are not intended to represent the performance of an investment account or portfolio, as some formulas or models may have superior or inferior results over diff ering time periods based upon macro-economic or investment market regimes. NDR generally provides a full history of a formula or model’s hypothetical performance, which often reflects an “all in” investment of the represented market or security during “buy”, “bullish”, or similar recommendations. This approach is not indicative of the intended usage of the recommendation in a client’s portfolio, and for this reason NDR does not typically display returns as would be commonly stated when reporting portfolio performance. Clients seeking the usage of any NDR content in a simulated portfolio back-test should contact their account representative to discuss testing that NDR can perform using the client’s specific risk tolerances, fees, and other constraints.

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Copyright 2021 (c) Ned Davis Research, Inc. All rights reserved.

See the signals. Avoid mistakes.Founded in 1980, Ned Davis Research Group is a leading independent

research firm with clients around the globe. With a range of products

and services utilizing a 360° methodology, we deliver award-winning

solutions to the world’s leading investment management companies.

Our clients include professionals from global investment firms,

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market digest – may 2021

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