More Bullish, Really?

1050 words - a 3 minute read.

It almost feels weird typing those words, more bullish, given that the SPY has been up 15 of the past 17 trading days including the best 5 day period of the yr. which went exactly as planned. Short term ok – we have been quite bullish and quite vocal about our outlook for a performance chase into YE as the Big 3 headwinds (sentiment, positioning and seasonality) turn into tailwinds. Note that when S&P is up 20% or more thru October the last 2 months of the yr. average 6% return vs 3% across all periods. So far, so very good.

But my question pertains to the longer term, into next year and beyond. My Asian reopening morphing into a synchronized global economic expansion case seems to be playing out, judging from some pretty solid PMI data out of the region. China’s zero Covid approach is generating some angst (for context China has reported under 100 cases per day vs 1200 US deaths per day) but its October Service PMI was the best since July. 

As I wrote in last week’s Monthly, we are in transition across Covid, Climate and the more temporary supply chain and energy price spike issues. Bloomberg’s Supply Chain Indicator suggests we are past peak while leading logistics company CEOs note we are “through the worst”. EU Nat Gas and China thermal coal prices have been cut in half in a matter of weeks. 

As these issues fade, I think it is worth contemplating the idea that 2022 will be a transition year to relative normality or what passes for normal in a Covid, Climate, Analytical Speed world. 

A world where Covid & Climate are with us but as background, not front and center; where the short term issues vexing us fade in the rear view mirror, would allow investors to contemplate a world of above average GDP growth, above trend inflation & high nominal GDP growth which begets solid margins and good earnings. Note JPM’s most recent EPS update highlighted how the 2nd largest % of SPY constituents in the past decade have raised forward earnings guidance. Earnings beats have been strong in Europe and Japan as well.

I believe we could be on the cusp of a sustained period of above average global growth fueled in the short term by a massive and global inventory restocking, strong consumer demand from record household net worth levels on both sides of the Atlantic and a  longer lasting cap ex boom (think infrastructure, climate proofing) & potential productivity surge which supports higher wages and moderate inflation. The US analogue is the 1995-1999 period.

Here is an interesting data point: 2021 is tracking as the 2nd best yr. ever for daily new ATHs  (roughly 60) for the S&P, 2nd only to… yes, you guessed it,  1995. Maybe that’s the signal amidst the noise.…that both market & economic analogues are lining up.

Thus, even bulls like me may not bullish enough. As a synthesizer, I owe the question to my buddy JC over at All Star Charts who first raised this question earlier in the week. It got me thinking about my framework and how JC’s question is EXACTLY the right question to be asking. 

Over the past two years, I have really integrated technical analysis into my process, seeing it as a way to provide guardrails during an ahistorical period. As JC has pointed out and I fully agree, Crypto trades with a very clean supply – demand dynamic that lends itself to technical analysis. As we continue to expand TPWA’s thematic investing approach, technical analysis is also a good way to lean into new areas like Climate, Cyber, Crypto and the rest.

So, if I am correct about 2022 being an almost normal year, albeit one with above trend Global GDP growth and inflation what would the global, cross asset return profile look like? Keep in mind investors would still need to focus on the three main market transitions previously identified (from liquidity to earnings driven equities, from Growth to Value led equity markets and from a UST bull to a bear market) but with both Stocks and Commodities in bull markets in a global economic cycle that is arguably early, not late, cycle, the return profile may be more robust than one thinks. Something to muse on this weekend while cheering on the marathon runners.

Here at TPWA we updated our model portfolios this week and remain constructive. Many charts show breakouts as various segments: small caps, financials, SPY, ACWI, EV, etc. exit their “stealth corrections”. US small caps in particular look very good; November tends to be their month to shine and so far so good. Reach out if you would like to learn more about our Model Portfolio Delivery Service (MPDS)

Within our Tri Polar World (TPW) framework, Asia would seem to be the main region to benefit from the clarity a more normal 2022 would bring. Japan should benefit from catching up in economic terms to the ROW; note its October Service PMI broke 50 for the first time since Jan 2020 while a major fiscal stimulus package is expected in the coming weeks. China, bombed out, oversold, with all the tough issues already out of the way, is of growing interest as it enters a possible “glide path” year with a full policy quiver if needed in the run up to the Fall 2022 PPC and Pres. Xi’s likely third term. The world’s biggest on line shopping day, aka, Singles Day, is next week (11/11); China could use some good news.

On other fronts the Fed has begun the Great Taper and the Biden Build Back Better plan looks to finally get its day in the docket with votes expected in the coming days. Both have long been “when not if” issues and so I expect limited market impact. With COP26 looking like a damp squib the Biden plan focuses heavily on Climate which lost very little from its original $ size in a plan that has been cut in half. Climate remains the single biggest investment segment in our TPW 20 100% thematic model portfolio.

TGIF – for our US readers don’t forget to change the clocks this weekend!