Ndr Global Allocation Strategy

NDR GLOBAL ALLOCATION STRATEGY

JANUARY 2019 Macro/Market Update

The global manufacturing Purchasing Managers' Index (PMI) During December, the MSCI All Country World Index (ACWI) dropped to 51.5 in December, its lowest level since September underperformed the Barclays U.S. Aggregate Bond Index by 2016. The PMI increased only once in 2018 (April) after peaking more than 880 basis points (bps). This was the largest negative near an eight-year high in December 2017. Although the monthly spread between stocks and bonds since May 2012. At manufacturing PMI has not fallen into global recession territory the start of 2019, less than 15% of global markets were still in (implied by a reading below 50), other economic indicators uptrends, and that percentage is likely to approach zero (as in continue to flash negative signals, meaning that the global past bear markets) before equity markets trend higher. For the economy is likely in an Organization for Economic Co-operation start of a bottoming process and continuation of the long-term and Development (OECD)-defined slowdown. The NDR Global equity bull market, look for cheaper valuations, panic selling, Recession Probability Model supports this claim as it currently and spiking volatility (the VIX has yet to reflect the levels of fear indicates over a 90% likelihood of global economic weakness. As reached at previous market bottoms). a result, we suspect that global manufacturing activity will likely continue to weaken in the near-term. Asset Allocation Summary

December 2018 Allocations (%) January 2019 Allocations (%)

Equities Fixed Income Cash Equities Fixed Income Cash

* See Equity Allocation Summary for how the equity allocation is distributed

*See Equity Region Selection Summary for how the equity allocation is distributed nn The equity allocation dropped this month by more than nn Two external (non-price) indicators favor equities over 19 percentage points to almost a 40% allocation fixed income as the market correction triggered exces- sively pessimistic sentiment and global central banks re- n n The fixed income weight jumped to near 60%, while the main accommodative cash allocation remains at zero nn There is no cash allocation this month as none of the inter- n n Within the equities/fixed income decision, no price indi- nal indicators favor cash over fixed income cators (internal) favor equities this month as two overbought/oversold indicators exited their equity signals nn Almost all of the macroeconomic, fundamental, and be- (chart, below) havioral indicators favor fixed income over cash

Global Stock/Bond Ratio vs. Stock Price Overbought/Oversold Indicator Daily Data 2008-12-31 to 2018-12-31 Number of Standard Deviations From a Rolling 1-Year Mean (Z-Score)(2018-12-31 = -0.38) 3.2 OVERBOUGHT/ 3.2 3.0 OVERSOLD INDICATOR 3.0 2.8 NOW FAVORS FIXED 2.8 2.6 INCOME OVER EQUITIES 2.6 2.4 2.4 2.2 2.2 2.0 2.0 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 -1.0 -1.0 -1.2 -1.2 -1.4 -1.4 -1.6 -1.6 -1.8 -1.8 -2.0 -2.0 -2.2 -2.2 -2.4 -2.4 -2.6 -2.6 -2.8 -2.8 -3.0 -3.0 Source: Ned Davis Research, Inc. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Customized version of I4112 All seven equity regions declined during December. Pacific ex. generated positive returns for eight months during 2018. Japan Japan and Emerging Markets were the best relative performers and Canada produced positive returns for six of the twelve as they each declined by less than 300 bps. The U.S., Canada, and months, while the remaining regions suffered negative returns for Japan were the worst-performing regions during December as the majority of months during 2018. Europe ex. U.K. and Emerging they each declined by more than 650 bps. Although the fourth Markets only had positive returns for three of the twelve months quarter proved challenging for the United States, the region with Europe ex. U.K. declining for five consecutive months. Equity Region Selection Summary OVERWEIGHT U.S. (VTI)

Emerging Markets (IEMG)

MARKETWEIGHT Europe ex. U.K. (EZU)

Pacific ex. Japan (EPP)

U.K. (EWU)

Japan (EWJ)

UNDERWEIGHT Canada (EWC)

Arrow indicates direction in which region's weight (as a percentage of benchmark allocation) moved from last month (up = weight increased, down = weight decreased). nn The U.S. remains overweight, with six of 11 indicators nn The U.K.’s allocation remains underweight, but increased bullish on the region, though the sharp post-Christmas this month as its relative price-based moving average bounce was enough for one of the price momentum indi- cross indicator went bullish cators to flash a bearish reversion signal nn Japan dropped from overweight to underweight due to nn Emerging Markets dropped from overweight to market- two price indicators and one valuation indicator exiting weight as Emerging Market currency and commodity indi- their bullish signals cators (chart, below) produced new bearish readings nn Canada continues to have the largest underweight alloca- nn Europe ex. U.K. rose from underweight to marketweight as tion as none of its indicators changed signals this month two relative price-based reversal indicators became bullish nn Although still underweight, Pacific ex. Japan’s allocation jumped higher from last month as relative momentum and reversal price indicators generated new bullish readings

MSCI Emerging Markets Relative Strength vs. CRB Metals Index Daily Data 2014-01-02 to 2018-12-31 CRB Metals Index 10-Day Smoothing (2018-12-31 = 834.85) CRB Metals Index 63-Day Smoothing (2018-12-31 = 840.36) 980 980

960 960

940 940

920 920

900 900

880 880

860 860

840 840

820 820

800 800

780 780 760 WEAKENING COMMODITY 760 740 PRICES ARE A HEADWIND 740 720 FOR EMERGING MARKETS 720

700 700

680 680

660 660

640 640

620 620

600 600

580 580

560 560

540 540

520 520 Source: Commodity Research Bureau, www.crbtrader.com 500 500 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2014 2015 2016 2017 2018 2019

Customized version of I7076 In December, large-caps, small-caps, Growth, and Value all nn Large-Cap stocks remain strongly overweight relative to suffered negative returns. Large-caps outperformed small- small-cap stocks caps, while Growth outpaced Value. The Russell Top 200 Index n outperformed the Russell 2000 Index by more than 300 basis n All but three out of 16 technical, fundamental, macroeco- points, which was the fourth-consecutive month of large-cap nomic, and behavioral indicators favor large caps over leadership. The Russell 1000 Growth Index outgained the Rus- small caps sell 1000 Value Index by more than 100 bps, while the Russell nn The Growth versus Value model now favors Growth 2000 Growth Index outpaced the Russell 2000 Value Index by over 40 bps. nn Ten of the 14 technical, fundamental, macroeconomic, and behavioral indicators favor Growth over Value

U.S. Style Rotation Summary

UNDERWEIGHT MARKETWEIGHT OVERWEIGHT

Small-Caps Large-Caps

Value Growth

Arrow indicates direction in which asset's weight (as a percentage of benchmark allocation) moved from last month (up = weight increased, down = weight decreased). NED DAVIS RESEARCH

Ned Davis Research Group NDR Global Allocation Strategy

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