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3 We aren't dismissing the signal of the yield curve, either. Indeed, we believe that the yield curve is a powerful tool to help determine where we are in the cycle. The yield curve traditionally flattens as the cycle progresses and the Fed embarks on a rate hiking campaign. When the bond market thinks that the Fed is close to done, the yield curve inverts in anticipation of lower policy rates. Does that sound familiar? It should, because it is precisely what happened this time. The critical difference between this episode and the experience of the mid-2000s, late 1990s and early 1990s is that the Fed continued to raise rates after the yield curve had inverted. This time they have already eased, and Chairman Jerome Powell's constant refrain to "sustain the expansion" leads us to believe Fed policy will be as easy as it has to be in order to fulfill that shadow mandate. A BUMPY RETURN TO TREND We think a better characterization of the current environment is a bumpy return to a previous trend. To explain, join us in a flashback to late 2015 and 2016. The global economy was sputtering after the commodity price collapse (oil prices dropped from over $100 per barrel to $30 per barrel from the fall of 2014 through the spring of 2016) and a bout of Emerging Market balance of payments crises (China spent almost $1 trillion dollars of reserves to defend the currency against capital outflows). It wasn't "recessionary," as job creation continued and the global consumer was resilient, but it didn't feel great, either. Manufacturing Purchasing Manager Indices suggested flat growth at best, global trade was stagnant, falling inflation was the norm, and global bond yields were low everywhere. Equity markets trended sideways, and repeated, disruptive headlines caused bouts of volatility. Then, the global economy got a twofold jolt. First, Chinese policymakers enacted an aggressive housing and infrastructure stimulus. Next, President Trump's surprise election victory ignited expectations for "reflationary" economic policies such as tax cuts and infrastructure spending. Finally, as shown in Exhibit 3, bond yields rose from the doldrums, and cyclically levered equities outperformed their defensive counterparts. > Consumer confidence, income and spending all look to us like they can sustain a healthy, albeit historically modest, pace of growth. Fast forward to today. Cyclically levered equities have given up all of their outperformance since the middle of 2016, and 10-year Treasury yields are back down to around 1.5%. You might think this signals that a recession is imminent, but we think it is more likely that the global economy is merely back to where it was before the Chinese infrastructure stimulus and exuberance over President Trump's reflationary policies. EXHIBIT 3: ENTHUSIASM AFTER CHINA STIMULUS AND TRUMP'S ELECTION WAS SHORT-LIVED Cyclical vs. defensive equities (Indexed Aug. '14 = 100) and 10-year U.S. Treasury yield Source: Bloomberg, Goldman Sachs. Past performance is not a guarantee of future results.

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