It's All About The Timing

1375 words – a 5 minute read.

Happy Friday the 13th! Guess whose not scared? Global Equities – that’s who, as they continue to power ahead led by the US/EU twin engine combo with Europe on track for it’s 10th up day in a row, its best streak so far this century.

As I thought about what to write today, it struck me that timing is often key to outcomes and the current set up speaks to me in that sense. From Delta to seasonality, from Biden & politics to the Fed, its all coming together nicely. Cross asset wise, equities have the bit between their teeth, sniffing out a strong YE and 2022 perhaps, while bonds are confused (highest Neutral positioning since February), the USD oscillates and Commodities have their day in the wringer.

Pres. Biden gets his bipartisan infrastructure package thru in the midst of a startling rise in the Delta variant, (one wonders whether Rep would have signed on if Covid was truly in the rear view mirror) while the “poor seasonality” argument withers in the face of August setting up as  SPY’s calmest month since Nov 2019. Delta fears peaked nearly a month ago (7/19) while MS expects peak US cases next week based on the UK life cycle. 

The lack of bond vigilantes and the easing of “sticky inflation” (Atlanta Fed core sticky inflation 3M annualized estimate peaked 2 months ago at 4.6%, July came in at 3.3%) allows the Fed to taper whenever it wants in what will surely be one of the most telegraphed policy moves in modern history. July price data suggests US inflation has likely peaked & while it may remain elevated vs trend, the wage data does not support embedded inflation risk fears (Q2 US ULC +1% y/y).

Earnings have been a powerful support with US EPS up 22% ytd, more than the S&P itself, meaning stocks are cheaper today than when the year began. JPM points out that of the SPY companies revising guidance over 70% revised upward, the 2nd best figure in the past decade. Non US DM earnings were also very strong. As the global economy recovers & liquidity ebbs (JPM sees global excess liquidity in place thru 2022) we are morphing to an earnings driven market, just like we are supposed to, while having the PBOC in reserve.

The master class in bubblet popping continues and moves cross asset to Commodities with iron ore (off 26% in a few weeks) following oil which followed lumber in healthy pullbacks. WTI held support this week after a bad run which has left one segment of the energy space, midstream pipelines, looking mighty appealing. A recent Invesco report noted that distribution coverage for US midstream companies is at 2x, the best in years as is valuation on a EV/EBITDA basis. Sporting a 7% dividend, we have a large exposure to the space in our global multi asset model.

We remain of the view that the Delta variant spread is being overcome by the vaccine/vaccination surge & that China policy fears are also discounted & that we are shifting from a staggered reopening to a synchronized global expansion which will result in higher rates and outperformance by Value and Cyclical market segments and markets. 

JPM has joined this POV arguing that rates & cyclical sectors have bottomed, positioning is cleaner (highlighted here last week) and Delta’s US peak is imminent. Post the debt ceiling decision I see a real risk of a UST rate spike as bond investors price in a better Fall.

Speaking of Cyclicals one would be remiss to not point that XLF (US Fin ETF) hit a new 52 week high this week as loan growth picks up, suggesting that the bond yield lows are in. Across the pond, European banks (EUFN) now sell at a 10 year relative valuation low vs US banks even though the ROE discount has narrowed considerably. European real rates are a record -2%;  both are well represented in the global multi asset model portfolio. 

I loved the Biden quote post the Infrastructure deal: “After years and years and years of ‘Infrastructure Week’ we are on the cusp on an Infrastructure Decade”. He is spot on. The budget outline for the $3.5T human capital plan includes the Clean Electricity Payment Program (CEPP) which aims to reduce 2030 grid carbon emissions by 80%. It also includes language around carbon import fees which suggests a Carbon Border Adjustment Mechanism (CBAM), akin to what Europe is likely to impose, may be feasible in the US. While there will be some horse-trading I expect the deal will be done this Fall and done very close to the $3.5T… the Biden team has been very good achieving its domestic policy objectives.

This removes my “Bear Case” fears of a sudden and sharp growth slowdown. Bloomberg’s Global GDP Nowcast calls for 1.8% Q/Q global GDP growth in Q3, a pick up from Q2 & supporting our thesis of acceleration and expansion. Morgan Stanley just raised its 2022 US GDP forecast to 4.9%; slowing from peak growth yes, slowdown, no. The potential for above trend growth is rising sharply: pro cyclical spending coupled with a climate led cap ex boom and infused with a tech led productivity surge – its not in anyone’s forecasts.

As Delta fades, back to school unfolds & vaccinations increase we expect US growth to reflect stronger jobs gains and consumption with US household net worth off the charts given record stock and home prices (US household financial distress at record lows). Q2’s very low inventory levels provides another leg of support for stronger 2H growth as inventories are rebuilt as does job growth given that US GDP is back to pre Covid levels while 6M fewer folks are employed.

 We are approaching a seasonal turn, as analysts, strategists and PMs return from summer vacation & start to focus in on 2022. Its worth noting that a recent Harris poll found more Americans think the worst of Covid is ahead of us (54 %) rather than behind us, the most since February. Yet, Bloomberg’s excellent Covid Tracker points out that globally there are 42mspd, enough to vaccinate 75% of the world’s population in 4 months – yes by YE. Is that the global investment narrative? Heck No, but it should be. Europe and Japan are both giving close to 2.5mspd… we continue to expect Japanese equity to make a cyclical move higher as US rates rise in the 2H.

The intensity of the daily media focus on Delta, across almost all media, almost all the time, has made it virtually impossible to look beyond the day to day, hugely negative, Delta talk. As investors we need to remember the market is a forward looking, discounting machine and so we too need to look forward. 

Soon enough Delta will have cycled through the globe while I am not aware of another variant anywhere near as worrisome which suggests that as investors return from vacation & start to contemplate 2022 & a post Delta variant world, a vaccinated world, a world of synchronized global expansion with solid EPS growth, flat positioning, and YE approaching it could set up a strong run for risk assets. Are you positioned for that? 

Should one wait for a 10% pullback to get invested – after all its been over 280 days since the last one… well our friends at MRA put out a chart this week showing that in each of the last 3 decades there has been at least one run where US equity didn’t correct 10% for over 1,000 days, i.e., for virtually 2 more years. In addition, BofA has noted that the recovery time from sharp daily drops is the SHORTEST it has been in roughly 100 years (chart back to 1928). You decide; our two Model Portfolios remain fully invested.

Something to muse on these next few weeks.

I enjoyed my inaugural Money Show webinar this week – reach out if you want the deck – its killer. 17 different sources in under 20 pages.

Please note: Friday Musings is going on vaca for the next two weeks… see you in September… Be well!