Better Lucky Than Smart
Clarity cometh but it comes slow. The Blue Wave I expected failed to materialize but it didn't matter as investors were happy to trade diminished stimulus sizing for less risk of higher taxes. Expect a Biden Presidency with the Senate up in the air until January & the runoffs for the two Georgia Senate seats.The amount of pre election litigation was substantial and cleared away the likelihood of difference making post election litigation.
I covered this ground and more with Real Vision’s Ed Harrison yesterday: growing clarity across the Big 3: elections, stimulus and vaccines, the Rotation Trade, both sectoral and geographic, the onset of a bear market in long duration Sov debt and the growing appeal of deep cyclicals/oil as we approach 2021 and a global economic boom.
We also went in depth on two new thoughts regarding the Tri Polar World (TPW) thesis: the growing outlines of regional FX blocs across Asia (RMB) Europe ( Euro) and Americas (USD) as well as the role each region will play in the coming decade - hint the America's role is least clear.
What a week - from Peak Uncertainty to the most oversold US equity market on Election day since 1904 to the best voter turnout in over 100 years to the best 4 day advance for US equity since 1982.
The ROW participated too: Europe’s banks rocked while China’s RMB rose to a 2.5 yr high vs the USD & Japan’s NIkkei index closed at its highest level since 1991. Japan’s equity market is the quietest global leader in a while - up 9% in USD over the past 3 months - better than S&P, better than EM and yet no one talks about it.
Global equity leadership is quietly shifting to Asia whose success reflects its 1st in, 1st out of Covid appeal. We noted this with our Covid investing formula months ago: control virus > reopen widely > broad stock market advance > outperform. We continue to overweight Asian equity including Japan and East Asia/China.
Post election the focus shifts to US fiscal stimulus which remains a when not if question - sooner is better and there is a chance for stimulus to be tied to a new Govt spending bill that must be agreed upon by Dec 11th.
Speaking of stimulus, did anyone notice there was a Fed meeting this week? Lack of Fed focus speaks volumes about the new policy dog in town - fiscal has the lead and the leash.
NOTE: the timeline to stimulus clarity may be superseded by vaccine clarity. As every day passes we come closer to the conclusion of phase 3 trials and learning about the efficacy of vaccines. We expect such by year end if not by month end and expect financial assets to react strongly to positive or negative news.
We are about to shift from Covid speed of science to speed of delivery; we remain constructive on the potential for rapid and successful vaccine distribution, given that the most well oiled part of the global economy is the logistics and transportation segment.
Speaking of oil we have been struck by two opportunities in recent weeks: the stabilization of deep cyclicals like the airlines (even with surging case #s) versus the broad equity market and the mispricing of the oil markets should a vaccine or stimulus become apparent in coming weeks/months. Risk reward in airlines and oil seems quite compelling with SPY only points away from a new ATH.
As such that is where we have been adding to our exposure: across both equity and fixed income oil-related investments. Energy now represents only 2% of the S&P while XLE just had its lowest monthly close in 16 years. If we are correct in our view of a global economic boom in 2021 then there is no way oil trades under $40pb.
On the boom watch two data points caught the eye this week: US and Chinese service PMIs. The global production rebound is well known, though underpriced by risk assets; the service side is where one needs to focus. Best US Service PMI# in over 5 years, 2nd best Chinese Services PMI in a decade! Europe lags but expect 2nd lockdowns to have much less of a negative effect on the EU economy than the 1st round.
Add in record liquidity, continued stimulus, vaccines and we are setting up for strong 2021 global growth and the Rotation Trade both sectoral and geographic.