Testing Time
Happy Friday,
It appears the US will test the thesis that investors are protected from downside risk: either economic recovery continues or stimulus will be forthcoming. A DC deal along the lines of state funding in turn for corporate liability protection seems feasible.
Continue to expect Senators getting an earful while on break will lead to a September deal but falling markets may be required to move the White House along.
The fear of underperforming keeps sellers at bay as August volumes at least act like it's August. Over the past month, global equities are up 3% + led by the US up over 4% led in turn by Tech up 5% as Mr. Market converts poor seasonality into new ATHs.
Could US tech now benefit from ex US tech outflows on continued Splinternet fears? A real breakout from here requires more than just tech though and the lack of stimulus retards the necessary broadening of equities into Cyclical and Value sectors.
Many assets are testing key levels: stocks, bonds, gold, Dr. Copper, the USD etc. The 10yr UST action past 2 weeks encapsulates the risk asset tug a war we wrote about recently; last week’s near record rate spike followed by this week’s sharp retreat from key overhead levels wags the rotation trade. The USD has been down 8 weeks in a row and the VIX just broke 20. Expect continued choppiness.
Near term, we continue to focus on our Covid investing formula: control virus > broad reopening > domestic demand recovery (key given global trade woes) > stock market rotation > Asia/Europe outperform.
The counter is also important: failure to control virus > sluggish reopening > limited domestic demand > more stimulus needed > rising political risk (stimulus fatigue) > FX impact (USD). This is the state of the US.
Longer term, i.e., the next six months are likely to tell the tale - either we get an effective vaccine or we don’t. We don't need a weatherman to tell us which way risk assets will trade off that.
While EU/Asia have OPed the US over the past 3 months in August it's been all Tech and hence all US which begs the question why isn't European equity (EZU flat for month) in particular performing better?
Is it just taking a breather, is the Euro bounce to 1.18 a weight too heavy? PMIs today were not great but also not all that bad and talk of European outbreaks vastly overstates the #s when compared to the US with its 40k + daily caseload.
Other concerns continue to percolate: US political risk as the two candidates square off, US - China bashing goes to a new level. Political risk as we see it comes from tighter poll #s which will stimulate worries about a contested election (2000 suggests that's NG for stocks) while the RMB hitting 7 month highs suggest markets have taken on board continued US challenging China across tech space.
No one said it was gonna be easy (other than the robinhood bros) and so it isn't. Will August have a sting in its tail?
Stay tuned & stay frosty!
TPW Investment Management Team