Spooky Season

1900 words, a 5 minute, halftime read.

It’s not yet Halloween or election day in the US but there is all sorts of crazy stuff flying around  the infosphere. Its yet another reason why we want to keep things simple, zoom out not in and stay focused on the Long Cycle we laid out in our 2025 outlook earlier this week.

From the shenanigans playing out in Polymarket to the Economist cover showing a USD rocket there are both new and old ways to get it wrong. Polymarket, an offshore, crypto based, betting site that Americans are not allowed to use, one with no history and subject to the most rank gaming (no pun intended) is the new way.  

Pushed hard by Elon Musk in his new role as chief Trump fanboy, Polymarket shows skyrocketing odds of a Trump Presidency even as the candidate is either cancelling appearances left and right or stumbling badly (or shall we say dancing foolishly) in the ones where he does participate. At the same time VP Harris is crisscrossing the country, being interviewed by Fox and benefitting from what appears to be massive early voting turnout that is skewing heavily to the younger demographic and women. 

We continue to think Harris will win handily and note the chart (Chart 15) we published in the outlook showing the expansion of Gen Z and millennial voters in 2024 vs 2020 and 2016. The numbers are staggering; Gen Z goes from 34M voters in 2016 to 48M In 2020 to 65M today vs Boomers roughly flat at 50 M. In other words, 15 M more Gen Z/Millennial potential voters than potential Boomer voters. BTW, CBS notes Harris is +35 with Millennials while CNN notes first day voting in Georgia resulted in an 85% increase in votes vs 2020 (252k vs 136k).

Bloomberg’s John Arthurs has a nice piece today where he lays out how the adoption of the Trump victory thesis could spell trouble for the USD just like the certainty that Remain would win back in the 2016 with Brexit led to the biggest one day fall in the history of the pound.

This is where the Economist cover curse comes in. Those who have paid attention over the years know well that the Economist cover is a classic contrarian indicator. JC Paret of All Star Charts nails it with this comment: “The most reliable contrarian indicators in the history of financial publications are telling you that the U.S. is the Envy of the World and they expect it to keep going. Here's the exact quote: "The American economy has left other rich countries in the dust. Expect that to continue" - The Economist.  We’ll fade that thanks.

Here's Bloomberg with the USD set up: “Foreign investors have increased their net holdings of US assets by a staggering $40 trillion since 2020, with the dollar still close to a multi-decade high in real terms.” It appears to us that the USD is at risk regardless of who wins on Nov 5th. If Trump wins, we believe his economic policy mix will lead to foreign investors departing for home shores. Apollo notes: “Today, 58% of US financial assets held by foreigners are equities. In 2010, 33% of financial assets held by foreigners were equities.”

If Harris wins then the Brexit related pound debacle may come into play as those folks foolish enough to believe Polymarket vs their own eyes and ears get what they deserve.

For us here at TPW Advisory & our clients our 2025 Outlook lays out the path we see developing for the global economy and risk assets. The keys as we see it are strong underlying trends in both the global economy, visible in how it powered through a sharp rate hike cycle without recession (due mainly to the fiscal response inherent in the new industrial policy mix & global equity markets which absorbed a sharp correction in its leadership group (Big Tech) without a sell off as recession fears gave way to rotation within global equities.

This sets the stage for the continuation of a relatively young equity bull market – one that has considerable time and space to run before it reaches maturity. We expect it to do just that given our view that continuity – continuity in economic outlook, political landscape and policy action will provide the set up for continuity in global risk asset markets, primarily through the earnings channel. US Q3 EPS to date running at 6% level vs pre release estimate of 4%. Low bar.

We see no major imbalances in the global economy, note fully employed workforces in the US and Europe, with consumers in good shape as household net worth skyrockets due to record home and stock prices while companies remain cash rich and Govts recognize the need to invest to meet the moment in the AI space, climate mitigation and defense spending. Atlanta Fed Q3 US GDP Nowcast just raised to 3.4% on the back of solid retail sales.

Continuity in the economy depends in large part on political continuity and we expect just that with VP Harris winning handily and thus sustaining the Biden Harris policy mix that has made the US the envy of the DM economies. We note Pres. Xi in China has recognized the risk to China of a Trump Presidency (The T word)  & has decided to hedge the risk of a Trump win & sharply higher tariffs. 

We believe China is cutting off the left tail of a big slump in the economy, not trying to goose it sharply higher. Over the past two years China is growing roughly 5% in a quite stable fashion -  we expect more of the same and see continued policy support as limiting downside risk while upside equity reward remains a distinct possibility given valuation & positioning. In the near term we await the NPC meeting later this month, the body with the power to approve fiscal measures which we expect to be robust and supportive of higher equity prices. Bad econ news = good stock news as it will drive more policy response.

The EU has a new leadership team with a 5 year mandate and lots of work to do to enhance Europe’s competitiveness position in the Tri Polar World as both China and the Americas have done a better job of industrial policy making, integrating public and private investment and expertise to capture the highlands of today’s global economy. In the interim the ECB has our back as it will continue to cut rates as it did yesterday, safe in the knowledge that inflation (its single mandate) is under the 2% target not above it as in the case of the dual mandate US Fed.

Economic and political continuity provide a good backdrop for policy continuity - if its working why change it? We anticipate continued easing of interest rates in what is likely to be a global synchronized rate cutting cycle that will provide liquidity to both physical and financial markets. We expect continued fiscal support as well given the already approved investment spending in the pipeline in both Europe and the US. Fiscal policy should also be visible in Asia as China works to stimulate the consumer and Japan looks to sustain its economic recovery.

Continuity across our Global Risk Nexus (GRN) of economics, politics and policy set up market continuity as well. This is what really excites us as investors as we look forward to the years ahead. We see a young bull market coupled with continuity across the GRN to suggest both the time and space for the bull to mature and continue widening out as earnings come through and the price investors are willing to pay moves higher, esp. in the non US equity markets which remain very cheap. We note several segments of the global cross asset space have room to significantly increase in price to make new ATHs. 

We love 3rd party valuation especially when it comes from someone as sharp as Blackrock’s CEO Larry Fink who noted following its Q3 results: “I have never felt more optimistic .” We note the symmetry between where 2025 falls in our global blue-sky outlook for the 2023 – 2027 period & where the equity bull market is in its lifespan at 2 years old, not quite middle aged given average 5.5 year life span. 

We also note that year 3 tends to be a rest year when the bull market averages roughly 5-7% which fits with historical EPS growth for the S&P. Currently, 12 month forward US EPS calls for 12-14% EPS growth but we note both GS and Dr. Ed Yardeni project high single digits SPY returns next year. Apollo published a nice data set today showing that historically, the current forward PE at 22x leads to limited forward returns, usually 3-4%. The number of data points suggesting moderate US equity returns ahead continues to grow.

This syncs up well with our rotation to the laggards thesis given that the best environment for non US equity, thematics etc. is for the US equity to do just ok. When the S&P goes up a lot no one cares about ROW; when the US goes down hard everything goes down. Middle of road S&P performance is the best set up for ROW catch up and that’s just what we see ahead.

Given this set up we want to be sure to be invested in the laggard segments which should play catch up as the bull market matures and widens out. We have identified these segments in the past: US SCs, EM equity, thematics & Commodities top the list. These segments are very visible in the chart work we just went thru as part of our monthly model update meeting. 

We can see many such opportunities across our two model portfolios, our Global Multi Asset (GMA) and our TPW 20 thematic model. From thematics like ARKF in Future Tech to LIT in Climate and on to Commodities like COPX many charts show big bases – some encompassing the past two years reminding us of the old trader adage: the broader the base, the higher in space. We note the NYSE Advance Decline line is hitting new highs supporting the rotation thesis.

The pickup in thematics is best shown by noting that the TPW 20 model was up roughly 50% more over the latest period than the already strong GMA model performance. Given both our outlook & performance we made only minor changes to our models this month. We remain fully invested and OW Equity & Commodities, UW Fi. We continue to tilt toward US Cyclicals, SCs & thematics, non US equity including China tech & Commodities across the mining, energy & climate spaces.

Before closing we also want to note the strength we have seen in the Infrastructure sector as represented by PAVE, GRID, PHO, XLI etc. These are some of the strongest charts amongst both our models and we invite you to take a look for yourselves to see what we mean. These ETFs benefit from continued economic strength, the industrial policy mix we spoke of above, together with climate mitigation. 

 Please enjoy the video discussing our 2025 outlook! https://www.youtube.com/watch?v=ZGxkXp3rV34

We are off to Durham for tonight’s big game vs Fla St as Duke football aims for its 1st ever W vs the Seminoles to go bowl eligible! GO DUKE!