Speedy Summer

1410 words – a 4 minute read.

We touched on how fast paced things are moving in last week’s Musings but the action this week, from the Biden decision and the adrenaline shot it gave to the Democratic Party to the continued sharp OP of Small Caps vs tech and on to the unwind of the global carry trade leaving Yen bears nursing some serious wounds, this week has been a whole nother dimension.

We continue to see the simultaneous equity market pullback and rotation as being two sides of the same market coin and believe the broadening participation inherent in the rotation will end up extending the bull market. The pullback has served to reverse the excess positive sentiment that had built up in the market with StoneX noting: “Looking at the latest AAII sentiment indicators for retail investors, bullish sentiment fell by the most since February 2023 this past week while bearish responses rose sharply”. IBES data suggests that Russell 2000 companies are expected to report a nearly 18% rise in second-quarter profits, snapping a five-quarter streak of year-over-year declines & supporting the rotation. 

Underlying US economic data continues to be solid with Q2 US GDP showing an acceleration in economic activity with personal spending up 2.3% and business investment picking up to its fastest in a year. The Citi economic surprise index looks to have bottomed & on the inflation side (our global macro surprise #1 for 2024 – lower inflation, sooner than expected) today’s PCE # serves to confirm the likelihood of the Fed joining the global rate cutting cycle in September. S&P Global’s US Composite PMI for July was 55, the highest in two years & suggesting Q3 is off to a very good start.

Lest we forget its earnings season as well and JPM notes that 77% of reporting US companies have beaten on the Earnings front with earnings running at an 8% Y/Y increase. European companies and Japanese companies are also beating estimates and showing earnings growth though at a lesser pace than that of the US companies. We continue to argue that the earnings acceleration is global.

From a political POV the past week has been an amazing one that leads us to think about reinstating our Democratic landslide projection that we had entered the year with. Recall that following President Biden’s disastrous debate performance we had retired the landslide view though we continued to expect a Biden victory.

Now with the arguably superb strategic nous of President Biden, standing in there like Muhammed Ali in Kinshasa, employing the famed rope a dope strategy, Biden allowed Trump & the entire RNC convention to pound on him and then he stepped aside, showing love of country over personal ambition (one can’t imagine for a second the other guy doing any such thing).

We like this Carville quote: "The most thunderous sound in politics is the sound of a turning page". It supports this tidbit: This will be the first Presidential election since 1976 to not have a Biden, Bush, or Clinton on the ticket.

Biden’s strategy protected Harris and allowed her to hit the ground running & sew up the nomination which she has done to great effect. In an instant a political party in disarray, fighting with itself, emerged into the light unified and ready to take the fight to the opposition. The money raised, the amount of 1st time small donors, the reenergized nature of the big donor groups, the outpouring of desire to work on the campaign and the jujitsu move of taking the entire Republican attack of Biden being too old and flipping onto Trump is one that will be written about for a long time to come.

Now we are not political prognosticators (though we occasionally play one on TV) so our focus here is on what it means for risk assets both in the US and globally. We have been very clear in stating that the continuation of the Biden policy mix which has led to the US being the economic envy of the DM is key to our 2023-2027 global blue sky macro outlook.

We have been equally clear that the Trump policy mix would likely be a very poor one for the US, a view shared by Goldman Sachs, Moody’s, the Peterson Inst and 16 Nobel laurates. So, putting a Democratic sweep back on the table suggests that the medium term risk of a Trump victory upending the US outlook, potentially thru a USD crash, has been considerably reduced in our eyes.

Thus, we continue to be positive in our risk asset outlook through the rest of this year and into the out years of 2025, 26 and 27. The sharp nature of the current pullback in US and to a lesser extent the ROW serves to clear the deck. It’s also, as many have noted, exactly what history suggests we should expect during the 2H July and into August. 

Elsewhere the pace also has been speedy with China cutting rates 2x in a week to limited effect while the BOJ looks set to raise rates & European consumers demonstrate their capacity to consume as real disposable incomes continue to expand. China continues to struggle to reboot consumer confidence and stimulate demand with the 3rd Plenum being a damp squib to date.

Our 2 tech stack divide thesis continues to favor exposure to Chinese tech; we note the Bloomberg report that Apple was pushed out of the top 5 Chinese smartphone providers in Q2, for the first time in 4 years. The fast growing and large China tech space is and will increasingly be the province of Chinese tech companies which sell at huge discounts to their US peers.

Japan remains on the road to economic recovery with July’s Composite PMI up sharply to 52.6. We expect the BOJ to raise rates next week in response (market odds at 70%) which has had the somewhat predictable impact of reversing the massive carry trade & Yen sell off ($/Y down 6% in 3 weeks) which like the AI equity craze arguably got well ahead of itself. One can see this in the Mexican peso case as well.

So, then it all starts to make sense – it’s the summertime, things get overheated, mirages appear, folks get lightheaded and a bucket or two of cold water is needed to bring things back into focus. Ok, check - all that seems to have been done. Maybe what’s next is a little calmer waters, perhaps the US political scene stabilizes once Kamala chooses her VP (and boy don’t the Democrats have a deep bench to choose from – impressive).

We look ahead to a stable to strong US and global economy, the most synchronized global rate cutting cycle in 40 years (JPM), continued good & global EPS growth, the return to stability (global macro surprise #3) leading to the erosion of the money market mountain which in turn supports surprise #4, the early cycle thesis as rates fall, credit becomes easier to obtain, cap ex surges, productivity expands (global macro surprise #2) & the global manufacturing cycle picks up. Weak commodity price action (looking at you Dr. Copper) is a bit worrisome. 

BofA puts it all into perspective: "We continue to record readings on financial stress at all-time lows (dating to 1990)."

Let’s end on a high note; the NYT wrote a story this week on how the 2025 US economic outlook is quite good. It reported on how much of the Biden policy mix has yet to be spent and laid out how it will be spent in the next few years. The same holds true in Europe which increasingly recognizes it needs to do more jointly from debt raising to Capital Markets Union to defense spending. As we have written for years the 3 Cs of Covid, Climate & Conflict require big $, AI requires huge $... money that small states will struggle with which is why the EU sizing up is a strategic imperative.

Here’s the Finom Group: “$SPX has cycled from 5% above its 50-DMA to below its 50-DMA in 6 sessions. It's rare, but EVERY. SINGLE. TIME. that has occurred throughout history, 6 months later SPX was HIGHER”. 

Net, net we have more confidence in our global macro blue sky outlook this week than we did last week – that’s the power of a speedy summer!

Enjoy this past Monday’s  clip from the floor of the NYSE with Schwab TV. https://schwabnetwork.com/video/inflation-concerns-from-the-upcoming-election

Stay cool people!