Halftime Chalk Talk
Happy Friday,
And what a first half it was - too many records set, broken and set again to even mention. This one caught my eye though: according to BofA, Q2 is likely to be the best Q in 50 years for the S&P and best in 45 yrs for Global stocks. Does it feel that way to you? No, not to us either.
As noted in our June Monthly (link) some back and fill in risk assets makes sense - it's not a bad thing for time to slow a bit and allow policy makers & investors alike to gather themselves & prep for the 2nd H.
Hopefully these Musings will help. Grab some hydration & let’s reset.
How countries handle CV19 will likely be a key 2nd H driver to asset returns. The Americas (US, Brazil, Mexico, etc.) appear to be having its 2nd CV19 wave before the first one is over. The case levels, deaths and overall shambolic response to CV19 in the Americas is by far the worst in the Tri Polar World. Asia and Europe have handled CV19 so much better, even though they were ahead in the Covid queue.
Remember fears that China was facing a 2nd wave with its Beijing outbreak? Well two weeks later and it's under control, as are similar small clusters in SK, Germany etc. There is a playbook for this - sadly, the Americas can't be bothered to even read it let alone implement it. ROW is outperforming the US on CV19 & is starting to do the same in stocks (ACWX vs SPY).
Here’s the Q: Will this differentiated response be sufficient to catalyze a sustained, cross asset leadership change from the US to ROW with its more Cyclical and Value tilts? Will the USD roll over, will UST sell off? Watch the banks - US regulatory worries a buy opportunity - expect strong Q2 E. EU bank lending is up 7% y/y (best in over a decade) while broad money growth continues to power ahead, up 9% y/y.
Beyond the worst Covid response of any advanced country, the US offers growing political risk as it enters election season & anti-competitive strategies like shutting down work visa approvals. Of course this is offset by plenty of great tech companies but doesn't everyone already own those?
And who owns the Cyclical/Value segments? According to Morgan Stanley not many investors, with ownership levels near multi year lows. So if investors own Tech bc CV19 is accelerating digitalization (and it is) and no one owns the other stuff then how much downside to stocks is there likely to be?
With all assets moving roughly in lockstep since late February the 2nd H is likely to bring some distinction across and within asset classes. One already sees it in sell side research with JPM arguing the Value trade is already over while MS says it’s really yet to begin. I lean towards the old Firm.
With most assets range trading, now is the time to spend thinking through which way the ranges will break & when. Some things are breaking out: gold & gold miners, bio tech, others: financials, Dr. Copper, BUNDS, USD are worth watching closely. Will we get an inflation scare as demand runs into a disjointed supply chain?
One wonders if the 2H worries: 2nd CV wave, US political risk are being discounted now given daily record cases in the US leading to paused reopenings coupled with polls coalescing around a likely Trump loss and possible Dem sweep come November. Speed is Covid-19’s signature - a sped up discounting process fits.
JPM hi frequency data suggests global economic activity is 80% back to pre Covid levels… we continue to think investors are protected, either recovery continues or more stimulus will be made available… Republicans have been hesitant to support more stimulus but recent polling data (58% - new high - disapprove of Trump’s CV19 handling) is likely to change that. EU and Japan stimulus matches or exceeds that of the US.
The next few months are likely to be less volatile than the past Q; history suggests that strong Qs are followed by more upside and we expect that to be the case here. The Fall brings poor seasonality, US elections & for the optimists, perhaps the first batches of a Covid-19 vaccine… note that biotech breakout.
Closer to home, NYC reopens for indoor dining July 6th…hip, hip, hooray! Our neighborhood walk-a-rounds suggest outdoor dining is a hit.
Please note we will be on vacation the next two weeks; the next Musings will be mid-July.
Ok, lets get out there & WIN that 2nd H!
TPW Investment Management Team