2020, New Bull?
Happy Friday,
Today’s Musings come straight from Jay’s notes from a fun visit with Jon Ferro on BTV's The Open this morning - talking reflation & new bull market.
Link to full show (Jay gets on at minute 28).
NOTES:
SPY breaks above 3k and clears technical hurdles - blue sky above. Question is whether it draws in buyers? Surveys (BofA) suggest bearish sentiment remains dominant: 80% see U or W recovery, 70% see bear mkt, BofA Bull/Bear sentiment indicator pinned at zero - uber bearish.
I think we are in a new bull market - as one of my most experienced and best buddies said to me today – “I want to leave you with one point - we are in a new bull market.”
While not a technician, I respect & incorporate such, especially in fast moving markets. Technicals increasingly suggest new bull with unequivocally strong breadth thrust as 90% of SPY above 50 dma, the rally off the lows has retraced 66% of drop, moves above 61% typically suggest new bull and perhaps most importantly the shift in leadership from Tech to Cyclical - Value, Small Caps.
The Druckenmiller - Tepper equity hate fest a few weeks ago was the tell. It led to a quick 6% pullback - the S&P then ripped roughly 12% led by Cyclical- Value segments… when old leadership takes a break & new leadership emerges that tends to be a new bull market. Also suggests lots of left behind $ ready to come in on any pullbacks.
US Growth - Value spread remains at near record wides - how will it resolve? Does Tech crash or does the market broaden into Value - Cyclicals and go higher? Recovery supports the bull thesis while US tech is at risk in an election year as the Trump Twitter fight suggests. Hating on Big Tech and China represent the only two bipartisan POV in DC.
Reflation watch: CRB index breaking out, raw material prices skyrocketing: gasoline, oil, lumber up 81%, 62% and 45% off lows. Unlike in 2008-9, US consumer in good health with housing and stock market wealth intact, new home sales are already recovering while inventory is low, esp vs 09/10.
Today’s Consumer spending headline is a classic example of Bear Market headline vs Bull Market insight. Headline: US consumer spending plunges most ever; insight, US consumer income up 10% m/m vs -6% forecast while savings rate hits unbelievable 33%. Economists have no idea how to forecast policy support because they have never seen it.
The surprise will be US consumer demand recovering much faster than expected; BofA survey of 1st US states reopening reports restaurant spend already at 70% of Feb average. UPS’s move to peak pricing, 1st time ever outside for XMAS season, illustrates how better than expected (BTE) demand & supply chain disruption ( Covid-19, China) could lead to some inflationary pressures when none are expected, pushing up rates and helping Financials.
One thing Covid-19 has not yet upended - USD and US financial asset dominance - will it continue? Signs of non US starting to OP. Look at Japan: lift natl emergency and double stimulus in same week, cheapest major DM at 14.5x forward PE vs US at 21.5x, EWJ (Japan ETF) breaks above 200dmav, cash rich, and cyclical play. In Europe, the Joint Recovery Fund tied into the Green Deal sets stage for Europe (15x forward) to recover. Germany, Europe’s economic engine, is starting to recover with retail sales coming in BTE & Merkel stimulating big time (EWG -Germany ETF, up 11% on month, approaching 200d).
US - China tensions escalate with HK troubles: 4 unknowns with national security law: what it will look like (China drafting now), when it will take effect, how it will be enforced and what will the US response be? Speed/ferocity of US response driven mainly by US domestic political considerations. Lots of smoke yes, fire no - neither side can afford more economic weakness. Cold War no, War of Words yes (benefits both Xi and Trump).
The US better hope it's not a new Cold War bc it is on its own here - note EU response (sanctions not the answer) note pan Asia response - crickets. Market point: China = more than 1/3 broad EM equity index. Watch HK banks for capital flight indicators. Regarding non-US equity allocation EAFE beats EM, especially given DM policy flex (witness EU/Japan in past week) vs lack thereof in EM.
Risks remain: Covid-19 clusters turn to national outbreaks, US - China devolves into more trade tariffs (though been there done that), US reopening proves more haphazard than response to date...Buy Dips.
Final Covid-19 thoughts: virus serves to accelerate Tri Polar World process of regional integration as supply chains regionalize & capital flows stay closer to home. Covid-19 “prevention paradox” playing out: lockdown success leads to complaints about too slow reopening.
Feels that way in NYC for sure…
TGIF - what short week - this was loooong.
TPW Investment Management Team