Macro Strategy Chartbook August 2018 - Cresset ... Brexit Overview Brexit Timeline Pound, Euro and Yen vs The Dollar YTD Countries Hardest Hit by Brexit • The pound continues to

Macro Strategy Chartbook

August 2018

Executive Summary

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

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

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

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

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

2 Source: Bloomberg

Cresset Wealth S&P 500 Metrics: August 2018

Bullish Bearish

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Source: Bloomberg; Cresset Wealth Advisors

Chart #0838

Metrics

Cresset Wealth S&P 500 Metrics

August 2018

Valuation

Economy

Liquidity

Psychology

Momentum

Table of Contents

3

Slide Page No. Slide Page No.

The Global Consumer 4 The Labor Market 15

Central Bank Policy 5 Stocks for the Long Term 16

Direct Investing 6 Goals-Based Investing 17

Currency Monitor 7 Goals-Based Strategies 18

The Market Impact of Trade Tariffs 8 Interest Rate Implications 19

Credit Conditions 9 Asset Class Assessment 20

US Retail Sales 10 Implications of Trade Tariffs 21

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

Brexit 12 Emerging Market Dynamics 23

Household Fundamentals 13 Market Technicals 24

Inflation Watch 14 Disclosures 25

4

The Global Consumer Overview

Euro Area Retail Sales vs Confidence

Japan Retail Sales vs Confidence

Retail Sales YoY Growth through July 2018

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

• Internationally, retail activity has been steady.

5

Central Bank Policy Overview

Inflation Rate by Selected Countries

Central Bank Policies: Overnight Yields

The Fed Funds Rate vs the Taylor Rule

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

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

6

Direct Investing

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

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

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

Overview

Average Family Office Portfolio Distribution

Share of Family Offices with Direct Real Estate Exposure

Private Investing by Type

7

Currency Monitor Overview

Purchasing Power Parity (using CPI)

Inflation Expectations and the Dollar

Major Currencies Denominated in Gold

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

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

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

8

The Market Impact of Trade Tariffs Overview

NAFTA Problems could Hit these States

S&P 500 Sector Performance YTD

Chinese Yuan per Dollar

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

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

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

9

Credit Conditions Overview

Credit Conditions Model History

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

HY Bond Spreads vs Corporate Bonds Outstanding

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

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

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

10

US Retail Sales

Best and Worst Retail Sales Growth YoY thru June

Inflation Expectations and Spending

Retail Sales shifting Online

• Retail sales growth is coupled with inflation expectations.

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

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

Overview

11

The US Economy Overview Comparative Economic Expansions

Manufacturing Employment vs Manufacturing PMIAtlanta Fed Q2 2018 Growth forecast

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

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

• US manufacturing growth remains robust despite the tariff threat.

12

Brexit Overview

Brexit Timeline

Pound, Euro and Yen vs The Dollar YTD

Countries Hardest Hit by Brexit

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

• March 2019 is Brexit date.

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

13

Household Fundamentals Overview

Income Growth by Income Quintile

The Real Cost of Gasoline on Consumers

The Saving Rate as a Percentage of Disposable Income

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

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

14

Inflation Watch Overview

Actual Inflation versus Inflation Expectations

Wage Growth versus Core Inflation

Components of Consumer Prices through June 2018

• Wage growth and core inflation are moving in unison.

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

• Actual inflation is tracking inflation expectations.

15

The Labor Market Overview

Share of Service Jobs

America’s Jobs Market

Best and Worst One Year Job Growth by Industry

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

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

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

16

Stocks for the Long Term

• Capital has far and away outpaced wages for decades.

• Dividends growth has outpaced inflation.

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

Overview

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

Income vs Capital: Saving vs Spending

S&P 500 Dividend Growth vs Inflation

17

Goals-Based Investing

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

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

Overview

In Retirement, Volatility Matters

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

Goal-Based Asset Allocation

18

Goals-Based Strategies

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

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

Overview

Return Distribution for Cresset Growth Strategy

Return Distribution for Cresset Lifestyle Strategy

Standard Deviation for Cresset Strategies

19

Interest Rate Implications Overview

10-Year Yield versus Copper/Gold

The Slope of the Yield Curve

Interest Rates and the Economy

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

• The relationship between copper and gold imply lower yields.

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

20

Asset Class Assessment

Asset Class Performance YTD thru July 2018

ETF Fund Flows

Asset Class Valuation Comparison

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