Listen To Stox, Not Vox

1641 words -a 4 minute read.

Enjoy our Friday Musings on Thursday; it’s like getting tomorrow’s news today! Actually, tomorrow is Good Friday & so US financial markets are closed. The point of today’s title is that one should listen to stox (stocks) in particular & markets in general rather than listen to all the voices out there (Websters: “vox” · popular sentiment or opinion: the voice of the people).

Today, our buddy Callum Thomas notes a historic gap between US investor sentiment which has picked up materially and consumer sentiment which remains pessimistic and recession focused. One of these is wrong; we want to listen to stox not vox.

When we listen to the markets today we hear that stocks continue to power ahead and not just the Magnificent 7 or the US but most sectors/stocks (80% of S&P 500 constituents above 200dmav) and most countries. JPM notes: “Thirty-five out of 48 MSCI countries we track are higher on the year—and the United States ranks 14th”. ACWX is on the verge of a breakout from a 17 year top (2007).

 We hear that Cyclicals are significantly outperforming defensive sectors both in the US and globally. EU equity is up 9 weeks in a row while folks get more & more negative on its economy; it reminds us of the US last year. Listen to stox, not vox. A global recession is highly unlikely and a growth pick up is more likely than a slowdown.

It’s not just stocks either; when we listen to US corporate credit we note that HY continues to Outperform both IG and the AGG further reinforcing that the economy is fine and all those folks talking about recession (yes there are still some) or growth slowdown are not good listeners (among other things).

Commodities provide an excellent current example. Did you know that Commodities are the world’s leading asset class YTD? It’s true: GSG is up roughly 11% YTD vs ACWI up 9% and the AGG down 1%.  JPM notes: Stocks have outperformed fixed income by 10.2% so far this quarter, on track for the fourth largest outperformance over the last decade. What does that tell us – what is the lesson to learn?

At TPW Advisory the lesson we learn is that our early cycle call (macro surprise #4 in our 4 for 24 macro surprise list) is on point and being validated by the markets.  It tells us that global growth will be stronger than many expect and that we are in the beginning of a multi year period of solid global growth and good risk asset opportunity. BTW, ACWI is up a whopping 5% over the past 2 years.

Within Commodities, it's not just energy with XLE looking to break out during its best seasonal period (watch the $95 level and then the ATH at $101.5 – set nearly 10 yrs ago). Nor is it simply Dr Copper, breaking out above the critical $4pp level on both supply concerns and growing comfort on the demand side. It’s also gold breaking out suggesting that inflation concerns are overdone and should be faded.

The markets are rich in information if one is willing to listen and learn. It ties in with the old investing Q: do you want to be right or do you want to make money? We sometimes struggle with that Q even after decades in the business – our early work as a MS sell side strategist & our ego tell us to be right; our experience over the past twenty years managing our own capital and advising others tells us that making money is more important than being right.

We started yesterday on the floor of the NYSE talking with the folks at the Schwab network and enjoying a trip down memory lane as our first finance job was on Water Street just a few blocks away.

That afternoon we joined the folks at Winston Capital for a webinar, walking through our POV and taking questions. We outlined the solid fundamentals we see, especially earnings with Q4 2023 coming in double what was forecast, Q1 looking pretty solid (next up for markets to digest) and 2024 - 2025 consensus US earnings both up double digits. https://www.youtube.com/watch?v=yamMMFvqIcw

We noted how the global rate cutting cycle is picking up speed with the SNB being the first of the G10 to cut and Mexico’s CB joining the EM rate cutters. 2024 should see 10 of the world’s 11 main Central Banks cut rates for the most synchronized rate cutting exercise since 2008!

We pointed out the easy financial conditions & robust liquidity picture highlighting Apollo’s recent work showing that the combined asset base of US MMF and bank reserves total roughly $10T, double the pre Covid level, tying that data point into our Trillion Dollar Reward thesis we expect as more investors conclude that yes, stability has returned.

We discussed at some length how important a signal it was to see the markets & the main CBs coalesce around the same rate cutting or rate hiking view in the BOJ’s case; a coalescing that took place with barely a ripple of market unease. To recap, the Fed and US investors now sync up on roughly 3 cuts, down from 6, starting in June. Both largely agree on the inflation & GDP outlook with the Fed raising its 2024 GDP forecast to 2.1%, roughly the same as consensus.

A similar picture emerges in both Europe and Asia with the ECB and markets in sync for the same June start date to roughly 3 rate cuts. The BOJ ended its long standing & distinctly different NIRP and YCC policies and financial assets hardly blinked (though we are a little surprised by continued yen weakness).

We discussed our 4 for 24 macro surprises highlighting #2, better than expected global productivity, in the context of McKinsey’s bullish global productivity report released just this week (good company) as well as #3, our return to stability call, highlighting the VIX under 13 (versus its historical average of 19.5) and the MOVE index falling below 90 to levels last seen over 2 yrs. ago.

The above suggests that markets and policy makers are in a positive feedback loop & that those expecting a vol surge or market crash are not listening. It’s all very constructive and helps explain why equities have been so strong with the S&P up roughly 27% in 21 weeks – a run the likes of which Carson tells us has only been seen four other times in history: Feb ‘75, Nov ‘82, July ‘09 and Aug ‘20 – all pretty good times to be invested.

All this taken together supports and informs our view that we are early cycle in a global economic recovery stimulated by deepening regional integration in Asia, Europe & the Americas driven by supply chain regionalization, the AI race, the need to climate proof economies – all of which are global needs. In short, our Tri Polar World framework coming to life in real time.

We are optimistic not only about 2024 but the out years as well 2025, 2026 etc. Our analogue remains the US 1995-1999 period – the difference is this time its global. While many have given up on the recession call and embraced the markets more positive tone, very few have joined the multi year, blue skies ahead POV we espouse here at TPW Advisory – and that’s a good thing!

We concluded with our suggestions for fresh money buys, noting Carson’s US seasonality work (April 2nd best month since 1950, 3rd best past 20 years, 4th best past 10 years, 4th best in election year). In the US, we continue to be exposed to both the leaders, like tech (especially Semis) & cyclicals and would add to the laggards such as US small caps which, we agree with the Fund Strat folks, offer an excellent opportunity.

Internationally, we continue to be exposed to EAFE leadership in Europe & Japan & want  exposure to the laggards: EM debt and equity including China. We note that JPM just raised its Q1 China GDP estimate to 6.6% ann which led us to think about the divergent fortunes of the two tech stacks, the US and China.

We note the discrepancy between the China tech stack – one that will increasing have all of China to dominate, a market of 1.4B people growing at 5-6% pa vs the US tech stack with its market of 330M people growing at 2-3% pa. This is obviously a gross simplification but suggests the 70% or so relative discount on China tech seems overdone (Alibaba at 8x PE, Tencent at 14x), especially since those companies like their US counterparts are cash machines now employing stock buybacks. We remind one that KWEB can double and double again before reaching its 2021 high.

We view commodities as one of the best plays on our multi year blue sky, early cycle, return to stability themes. We see growing numbers of firms joining us in this call with GS, MRA Advisors, MS and others all discussing the 15% or so upside they see in the broad commodity complex. We see it in our flagship Global Multi Asset (GMA) model where COPX and XLE are the two best performers over the most recent period & remind ourselves to listen to the markets not the voices.

Happy Easter! Enjoy the long March Madness weekend – Go Duke with both men and women hoopsters still dancing (Duke is the only school in the nation to win its football bowl game & have both teams still hooping).

And for all you early risers, please note I will be guest hosting the 7-8 am block Monday on BTV’s Surveillance show with Jon Ferro – tune in for some insight with your coffee!