The first investment decision for many asset allocators – the US equity-vs.-fixed income relationship – has broken a key long-term trend and support level. The ratio of the S&P 500 and US Aggregate indices (we use ETFs as proxies because we can obtain real time intraday measures) has fallen below it’s 200-day moving average, which is making US stock prices vulnerable. The last time this occurred was in mid-2016 before stocks began their recent run of dominance. As we have been discussing for the past several months, economic conditions and US corporate fundamentals remain strong and are markedly different than the tug of war we experienced prior to the stock breakout that occurred in mid-2016. In our view, the market is adjusting to the mix of higher US interest rates and slowing economic growth in key regions. We are in the midst of US corporate earnings season with some key companies lowering earnings and revenue guidance, putting downward pressure on those stocks. We believe that the current market adjustment is healthy and we will see higher US equity levels as we head towards the end of the year.
