Thunderstorms Clear the Air
Happy Almost Friday,
Jay will be on BTV’s The Open at 9:30 tomorrow morning to discuss recent market action - be sure to tune in! Below are his notes for the segment.
On the Anniversary of 9/11 tomorrow we are reminded to Never Forget. #NYCStrong
NOTES
The healthy pullback foreshadowed in our August Monthly (link) is likely in its end stages, cleaning the froth from an overextended & overbought tech led, US equity market. Like a late summer thunderstorm, this correction serves to clear the air and allow for a change in temperature or in this case a change in equity leadership.
More important than the tech selloff is what's happening underneath, namely the rotation trade from Growth to Value and from Defensives to Cyclicals. Sparked by two data points: The CDC alert to prepare for a vaccine by Nov 1st and last Friday’s BTE jobs report, Value has sharply OPed Growth while ACWX OPed the US.
We view rising rates as the fulcrum for the Rotation trade, spurring on Cyclical/Value led by financials, materials, industrials etc while simultaneously harming Tech’s cash flow led valuation support.
Rising rates are kryptonite for tech; we expect rapid testing/vaccine to stimulate economic activity & lead to rising rates, especially at the long end which now has to bear all the inflation & supply related risks given a pegged short end.
Speed is the signature of the Covid Age and speed of science implies rapid testing & a vaccine in the next 3-6 months. Science, coupled with continued economic/EPS recovery (EPS revisions have bottomed & are turning up) support our constructive view on risk assets. During this pullback we have added to cyclicals/value & non US DM equity.
We remain negative on the USD and believe long dated Sov debt is at the beginnings of a bear market. A mini taper tantrum in long rates over the coming months cannot be ruled out.
We continue to follow our Covid investing formula with its focus on regions/countries that are controlling the virus, reopening fully and stimulating their domestic demand. In a trade contentious world it's all about stimulating domestic demand. Who has it and who can generate more of it - see China’s new dual circulation strategy (DCS). Investors, invest accordingly.
Big changes are afoot. We share the recent Bloomberg podcast with Paul McCulley (link) where he lays out some of the same changes we expect in the years ahead, namely the shift from monetary policy leadership to fiscal policy, the shift from capital to labor, the push for inflation (supporting the Fed’s new AIT strategy) and the likely impact all this will have on financial assets.
US - China decoupling, the shift from global to regional supply chains, the need to generate domestic demand, all serve to set up the shift from monetary policy (essentially exhausted) to fiscal policy (cheaper than it has ever been given rate structure).
In this vein, we note the governance distinction between US failure to agree on further stimulus and the recent decisions to provide further stimulus by Germany, France and Holland (one of Europe’s Frugal Four btw). The coming weeks should witness further fleshing out of Europe’s Joint Recovery Fund and Green Deal (we have been adding to clean energy during this pullback).
McCulley says democracy is at stake and that may well be true. As investors, we prefer to say that such a policy shift will end the US financial asset dominance of the past decade plus. We view the USD decline as a precursor to similar underperformance of US equity.
Thus to US political risk which looms large via a potentially close election leading to a disputed outcome (bearish US risk) and the implications of a 2nd Trump term. The worst set up for US risk is a Trump 2nd term coupled with a vaccine - governance challenges combined with tech kryptonite would spell relative underperformance vs more Cyclical/Value led regions.
The gridlock implied by a Biden presidency and a Republican controlled Senate would also be US risk negative - US cannot afford 4 years of gridlock in an era where fiscal policy matters more and more.
This is especially true from a Tri Polar World POV where China’s DCS implies further Asian integration while Europe makes a bid to own the Decade of the 2020s.
Back to School, Back to Work….
TPW Investment Management Team