Iterating In Real Time

1550 words – a 4 minute read.

We continue to focus our attention on the concept of continuity across economics, politics, policy and markets. As we discussed in our 2025 Outlook we believe this concept is key to sustaining our long cycle thesis in both global financial assets and the real economy.  

Our view remains that we are in the relatively early stages of a global equity bull market (now some 25 months old) and a global economic growth cycle underpinned by fiscal and monetary support across the Tri Polar World (TPW) as Govts compete in AI, Climate & Defense via the new industrial policy construct we have written about. 

Donald Trump’s reelection to the US Presidency, complete with narrow Republican control of the House, is a clear signal of US political discontinuity. As we wrote in our latest Monthly, our question is whether the expected US growth policy continuity we foresee is sufficient to trump (pun intended) this clear political discontinuity.

While the outcome reminds to be seen early-stage nominations to critical parts of the Govt including Health, Education, Justice, Defense and Intelligence do not bode well. The nominees to a person are unqualified. Several male nominees have been credibly accused of sexual assault – the 1st time in US history such people have been nominated to cabinet positions. One of them stepping down (Gaetz) just proves the point. Suggestions that the FBI will not do its normal background checks is another red flag implying most of this group of nominees would not pass such a background exam.

The ongoing knife fight surrounding the US Treasury Secretary nomination is emblematic of the challenges the Trump team will face in meeting its various objectives including boosting growth and thus stock prices while also lifting tariffs to levels that cause pain for Europe, China and Lat Am. The potential hothouse effect from stimulating an already above trend growth economy we first noted Election Night on Bloomberg TV remains a concern. It could lead to higher inflation and higher interest rates which could both slow the US economy and forestall Fed efforts to cut rates to offset that slowdown. This remains our principal worry about the US economic and hence market outlook.

While we await the future, we iterate in real time. The US economy continues to grow above potential with the latest Atlanta Fed Q4 GDP Nowcast suggesting 2.6% GDP growth. Inflation remains on its downward trend; consumption remains robust (Walmart comparable sales up over 5% L12M through October) and there are growing signs of a manufacturing upturn. The global economy is likewise in decent shape as China joins the US in boosting its economy via both fiscal and monetary support. 

Europe is supported by record low unemployment as real wage gains (Q3 nominal wages grew over 5% pa vs inflation at 2% - fastest wage growth since 1993) boost consumption while future ECB rate cuts lie ahead. More clearly needs to be done; we focus on upcoming German elections to perhaps catalyze its economic growth efforts while reducing Trump tariff risk.

We are intrigued by Trump’s potential to be a positive change catalyst for the ROW. This is the opposite of current market thinking and thus worth exploring. The kneejerk investor reaction to Trump’s election victory was to sell non US equity markets and buy US stocks. Foreign investors joined in boosting the USD to the point where it now presses against technical levels (and might be breaking out). 

The idea that Trump will boost US growth and reduce ROW growth is now in the price; post-election US outperformance has been roughly 5% with US stocks up and ROW down a few percent. We note that BofA expects the opposite with US GDP forecast to fall from 2.7% to 1.9% next yr while ROW GDP growth is expected to pick up to 3.5% from 3.2% with European growth picking up the most. All this of course pre tariff.

Those expecting an equity market repeat of Trump 1.0 should note the differences between now and then. Today’s US equity market is priced for something akin to perfection at 22-23x forward earnings and represents a record 67% or so of ACWI. In 2017 the S&P was priced at 16x forward earnings and represented 51% or so of ACWI.  Equity positioning, interest rates and budget deficits were all much lower than today.

With little to no room for multiple expansion 2025 US equity performance will truly be all about the E. If US exceptionalism is priced in, the ROW is arguably priced for the opposite with both Europe & China trading at record wide valuation discounts to the US. Should they respond to Trump with more aggressive pro growth policy action might that not be good for non US equity?

BoFA suggests watching tech stocks for signs of ebbing belief in US exceptionalism. We know valuation is not a good timing tool and so await a catalyst – The USD could be key. Marc Chandler notes: “Despite the dollar's strength, foreign demand for US stocks and bonds has waned this year. Consider that in the first eight months of the year net foreign purchases of US financial assets was about $270 bln, which is down by more than 50% from the same period in 2023 (~$606 bln). Stripping out short-term securities, the story is similar. Foreign investors bought a net $303.7 bln of long-term US assets in the Jan-Aug 2024 period. That is down from around $752.5 bln in the first eight months of 2023.”  

Bloomberg reports that: “Japanese investors sold a record $61.9 billion of US Treasury securities in the three months ended Sept. 30, data from the US Department of the Treasury showed on Monday. Funds in China offloaded $51.3 billion during the same period, the second biggest sum on record.” Trump wants a weak dollar – he just may get it. 

Shifting gears from the theoretical to the actual, we held our model portfolio meetings this past week and our deep dive technical chart review provided its usual insights. Some takeaways include global equities are by far the strongest asset class vs bonds and commodities which both look weak under their 200d support levels. Bonds look weaker than commodities; there is nothing that suggests we want to add to DM sovereign or UST risk. 

Commodities have been range bound for several years and look ready to break one way or another. Our bet is higher boosted by what the bond charts tell us & what we see in the energy space where XLE has one of the stronger charts in our Global Multi Asset (GMA) model. That suggests our thinking on the USD might also be correct together with our growing enthusiasm for non US equity.

The offset is that some significant damage has been done to various non US equity charts including EFA and parts of EM. ACWX has broken below its 200d support level, led by EFA which is likewise below its 200D level. EAFE actually looks worse than EM on the charts which reflects Europe’s a deer in the headlights look while China has stimulated. 

EEM remains above its 200d support level, led by China which sits above both its 200d support level & its pre stimulus levels suggesting markets believe the stimulus has cut left tail risk. We agree. Lat Am and E Europe have broken below their 200d support. Should investors start to come back to non US and EM equity we expect it may well be through broad allocations to EM debt or equity rather than regional or country specific ETFs.

We continue to think there is both short term tactical upside to equities through YE supported by rising EPS estimates (Carson notes new ATH in 12M forward EPS of $269) stock buybacks and a potential performance chase. Strategically we see further upside in the years ahead & expect the laggards to turn into leaders as the global bull market broadens out geographically and thematically. We note the equity market response to Nvidia’s earnings which suggests a clear broadening & reduced dependence on the Magnificent 7 theme.

On our TPW 20 thematic model review we noted that only a small handful of charts have broken their 200d support levels, mostly concentrated in the clean energy side. This space was another market segment that saw kneejerk selling post Trump’s election. Other segments did much better including Bitcoin (GBTC) and fintech (ARKF) as well as the cloud space (SKYY). Bitcoin has been the big Trump trade winner and looks to be drawn to that $100k level. ARKF has been pulled along in its wake. Both are very overbought. 

XBI was also quite weak during the period as the nomination of Robert Kennedy as Health Secretary was seen as anti-science, anti-innovation and thus anti bio tech. We think this is an overreaction given the possibility his nomination will fail and the likelihood of strong pushback to any major hobbling of the bio tech space which is one of America’s leading edges.

Duke plays its last home game of the season tomorrow night vs the Hokies… Go Duke & thanks to all the seniors!

Happy Thanksgiving to all – we have much to be thankful for! No Musings next week – we will be back in your in box on Friday December 6th.