R Stands for Resilient, R Stands for Rotation

1710 words – a 4 minute read.

As we enter the 2nd half of the year it’s worth noting how resilient financial markets have been to date. Led by US equities up roughly 15% ytd, global stocks are up 11% with virtually all regions up from EAFE to EM.

Commodities have also been strong with oil popping 15% in the past month or so, leading broad commodities to rise 11% thus far. Fixed income has been the laggard, with Barclays AGG down 2% in the 1st H though credit has done better.

Currencies have been pretty quiet; notwithstanding continued dollar strength talk, DXY is up roughly 4% ytd. The Euro has been quiescent while yen weakness has been predominant followed by some Lat Am led EM weakness.

When one thinks about the macro set up going into this year: namely, multiple rate cuts expected on both sides of the Atlantic, it’s worth noting that none of that happened and yet markets have continued to cruise along. Thus, the R for resilient title reference.

Resilient economies tend to lead to resilient financial markets as earnings provide the necessary support to look thru the noise. In this case, helping risk assets absorb the fastest and sharpest rate hiking cycle in recent memory without a hiccup. We are coming up on a year since the last Fed hike and not only is the US economy robust, there is no sign of the infamous lagged effect of the rate hikes.

Core PCE levels at 3 + year lows & US real disposable income #s reported today up .5% suggest inflation’s continued decline together with a consumer that is in good shape. Record prices for both stocks and housing result in rising per capita wealth figures while debts as % of disposable incomes remain well below peak levels.

A fully employed and growing workforce, rising income levels, stable rates & continued investment across multiple sectors from climate to infrastructure to defense and on to the AI buildout all serve to reinforce the idea that the manufacturing cycle could be ready to turn and put its shoulder to the growth wheel.

We continue to listen to Stoxx not Vox and suggest that those worrying about the consumer should check out the Retail ETF (RTH) which is close to new ATHs led by Amazon, itself breaking of a 4 year trading range.

R also stands for rotation and the past few weeks have been a master class in such put on by the US equity market. Given all the ink spilled about how concentrated the equity market is, how narrow the leadership is, how its really just a single stock market… one would assume that when that one stock took a header the whole market would follow it down right?

Wrong. Nvidia, the AI poster child and lead dog, took a super fast (as befitting its space) 15% tumble over the span of a week or so and yet the S&P barely blinked – down less than 2%. That is impressive and suggests real underlying strength; itself reflecting that much of the market had been quietly working off overbought conditions and was/is ready to move higher.

We quote John Kolovos of MRA Advisors: “I have always said that healthy rotation is the lifeline of a bull market.”

The neglected segments of the equity market remain numerous and range from small caps up day after day, to Industrials rallying on M&A news, to oil bouncing hard while the miners also engage in some M&A activity. There are some generational opportunities lining up in these neglected spaces thus it didn’t take much to bump these segments of the market up.

R also stands for Reactive and no that’s not in the title bc it would have been too long. But its worth noting that the financial markets have reacted only modestly to all the political drama taking place from Europe to the US to China and from Mexico to India and on to South Africa.

The mass media hysteria aside (France and Macron, Mexico and AMLO, Biden and Trump) its important to note that the actual financial market reactions have been pretty muted relative to past periods of upheaval. In Europe the cross asset reaction to EU elections has been limited, perhaps because EC Leader von der Leyen is likely to win a second term while the slate of top officials has been agreed upon without much fuss. UK elections up next.

Sure, there is a tempest in a carafe in France but here too the risk asset reaction arguably has been muted given the realization that cohabitation may not be the worst thing to happen and the lack of fiscal space is such that the goody bags of the right and left are unlikely to be opened wide. EU politics may turn out to be the world’s quiet space as the 2nd H progresses.

We are paying close attention to China and the upcoming Third Plenum, due to begun in mid July. China has been a less resilient, more volatile, equity market this year with its bond market making the running, a somewhat unique outcome in 2024. Chinese equity now rests on important support levels, suggesting that the Plenum outcomes could have a material effect on which direction it takes.

The Plenum has been delayed roughly 9 months or so since its expected date suggesting that leadership knows it needs to have an impact, raising the stakes even more for risk assets. We remain positively disposed towards our 2 tech stack divide thesis and thus with our KWEB position, itself resting on its 200 day support level as we write. Top Down Charts notes: “US tech stocks have outperformed global some 4x off the low point in 2008, and now trade at a 2-3x premium vs global.”

China is a value play in a growth world; it is very cheap relative to its own history and relative to both developed markets and other EM such as India. We continue to like the risk reward set up – much risk is reflected in the price – the reward, should China continue to recover economically with the help of some more consumer friendly policy points - could be significant. 

US equities represent the growth play, underpinned by solid EPS growth. As such, the US has continued to attract global capital to the point where the ROW is more heavily invested in the US than ever before, showing very little concern for any political risk even as economic commentators dig into both Biden & Trumps’ economic plans prior to last night’s debate.

Here's what Fintwit had to say: “What's amazing to me about this graphic is that Trump's tax cuts for the rich cost more than the Infrastructure bill, Inflation Reduction Act, American Rescue Plan, CHIPs, PACT, student debt forgiveness, and funding the IRS COMBINED.”

Thus, one might have hoped for a reasoned discussion about the future fiscal plans of both men because from what we have been able to gather they are quite different. Biden plans to raise taxes on the wealthy and corporates thus bringing the budget deficit back somewhat in line. Trump is all for extending his tax cuts (decision due next yr.) and adding a 10% tariff on all imports to add some fuel to what could become an inflationary fire.

An inflationary fire could complicate life for the Fed which seems set up for a September rate cut; it would be far from ideal if the Fed were to have to reverse itself in January – Feb to offset inflationary concerns should Trump win a 2nd term. This week saw 16 Nobel laureates release a letter stating that Trump’s economic policies would be bad for the economy while Moody’s released a report forecasting a 2025 recession should Trump regain the Presidency. 

Famed technician Marty Pring notes: “the Dollar Index has been in a trading range since the start of 2023. Its sheer size indicates the ultimate breakout could be followed by a sizeable move in either direction.” We continue to believe the USD could be at risk in a Trump 2nd term.

We have also laid out our view that Biden would win in a landslide, a view that must be retired after last night’s charade of a debate; charade because allowing a serial liar like Trump to spew lies uninterrupted or uncorrected for 90 minutes is not a fair fight with someone who is not a serial liar. 

Having said that, Pres. Biden started off slowly and while he gained strength and energy as the night wore on – in contrast to Trump who became progressively unhinged - Biden certainly did not help himself with voters’ #1 concern - his age. Granted its one night and a sharp contrast with his strong SOU address; perhaps it was a bad cold, perhaps he was overprepared.

Should one bad night sink a Presidency? TBD, especially when the other guy didn’t answer a single question, lied through his teeth, is a convicted felon, had no policy discussion at all & required three swings at the question of respecting the voters will come November to be wrestled into a semi yes answer. Trump remains a serious danger to democracy.

Yet if not for headlines across the media space proclaiming doom and destruction, a look at global cross assets suggest it was just another quiet summer night. Bonds flat, DXY flat, equities up a touch, no big deal. Same in Europe, notwithstanding French 1st round voting this weekend. OATS off 2-3 bps does not a crisis make.

Thus, resilient markets, suggesting our 4 4 24 global macro surprises: lower inflation, better productivity, a return to stability and an early cycle global economic recovery, continue to play out, underpinning risk assets. FInom Group notes: “112 Trading-Days in the book. $SPX is up 12.7%. When up between +12.7% - +17.5% through 112 days, S&P NEVER lower through year-end. Worst performance after 112 days was 1986 at +.9. Median Return > Year-end = +8.7% or SPX 5,872.” Here at TPW, we remain positioned for more of the same in the 2nd half.

Enjoy the 4th – TPW Advisory is off next week – back in your in box on the 12th!