Zoom Out, Not In
1489 words – a 4 minute (TV commercial) read.
Welcome to Fall, welcome to football season (American style) and welcome back to TPW Advisory’s Friday Musings! After two wonderful weeks off we are back at it – back in the saddle, back in the trenches and back in your in box!
What better way to end a short week than a Friday 6 am guest spot on BTV’s Surveillance show? Regular readers know what that means: the bulk of today’s Musings come direct from my show notes, including today’s title which I used in my opening comment.
Zoom out, not in refers to the tendency of investors and market commentators alike to zoom in on a specific data point, like today’s jobs number. Now one should not begrudge this tendency; after all it draws attention, everyone needs to have a POV on it and thus it becomes almost like a parlor game.
The problem is that one data point rarely makes the running (ok last month’s jobs # did kind of shake things up for a few days) and is usually updated, revised or forgotten about and replaced by the next zoom in opportunity within a few days or weeks.
So we want to zoom out and focus on the bigger picture, the bigger global cross asset market picture, the global economy picture and the outlook for the policy and politics spaces (to reference our Global Risk Nexus (GRN) process), all of which influence the earnings outlook which drives stocks.
Before we left on vacation we wrote Stick to the Process as a reminder to ourselves and our clients/readers who had been shaken if not stirred by the yen carry trade unwind and the tech selloff that accompanied it. Seems like good advice given that the back half of August regained nearly all the lost ground. While tech continues to act sloppy (FactSet notes the SOX with 5 5% daily down moves in just the last 6 weeks) the rest of the market place: Cyclicals, Defensives, Small Caps, Non US etc. all had a nice bounce in their step.
Thus, August ended up with the S&P’s 4th record monthly close in a row while RSP, the equal weighted S&P ETF, broke out to new highs as did many Cyclical sectors including Financials, Industrials etc. Our friends at Pinecone Macro noted that their Bristlecone Cyclical indicator hit a new ATH last week. Real Estate did well as did Small Caps. EAFE (EFA) broke out to a new all time high while 47% of ACWI’s markets hit new 52 week highs, the highest percentage in over 3 years… all in all, a broad based up move.
All this suggests to us that we want to repeat the mantra: Rotation not Recession. Sure, we have had a few tough days to start September (unwound the Overbought conditions) and yes everyone not living under a rock knows September tends to be a tough month for stocks but lets face facts that translates into an average return of -.75% or so for the month – should one sell out their positions for that? We don’t think so. As we advised in the pre vacation Musings: Stay the Course.
We want to stay the course because when we zoom out and look at the US economy and the global economy we see a healthy situation with fully employed workforces enjoying real wage gains and sitting in a very comfortable positions. Here’s Bloomberg: “The US debt-service ratio and debt-to-disposable income ratio have both been falling the last two quarters, and ex- the 2020-21 period are lower than any point since at least the early 80s.”
Now yes, it’s a good thing I am not a betting man bc I took the over on today’s 165K jobs estimate and would have lost given the actual, lower number. Yet, we see normalization of the job market, not sudden & rapid deterioration. For example, when we look at job openings vs job seekers its roughly a 1:1 ratio which is down considerably from pandemic levels but better than it was during the entire 2000-2018 period.
When we look at our 4 4 24 global macro surprises, written now some 10 months ago we remain comfortable with a positive outlook: surprise #1, lower inflation sooner, is on track on both sides of the Atlantic; surprise #2, BTE productivity also on track, especially in the US – this is key as it is the secret sauce for continued profit growth. Surprise #3, return to stability on track as inflation volatility collapses (5 yr. inflation breakevens under 2%) and surprise #4, early cycle not late is reinforced by Cyclical sector breakouts, Japan Composite PMI at 15 month high, BTE German factory orders for 2 months in a row & SK export growth (up 11 months in a row etc.).
But wait there is more; when we zoom out to the policy space we note that global liquidity continues to expand and that’s before the Fed starts to cut rates and just as we lean into a global rate cutting cycle likely to be the most synchronized in 40 + years. When we assess the outlook for public private co investment to deal with the needs of AI, Climate & Conflict we recognize the urgency and impetus behind this trend which we see as critical to understanding our global macro blue sky outlook for the 2023-2027 period. We note just this week the Pentagon announced plans to develop repair and supply bases in Asia, Europe and Lat Am (TPW anyone) while Japan’s leading auto companies announce a joint effort with the Govt to fund and build out a Japanese EV battery chain.
The public private funding process requires stability in Govt and we see just that in Europe with the EC leadership team being updated and enhanced under Ursela von der Leyen’s leadership. Here in the US the outlook for a Harris victory and a potential Democrat sweep of the House and Senate continues to manifest as the Harris team leads in the polls, leads in fundraising by a wide margin & absolutely dominates the ground game across the country (one example: Harris field offices 1500, Trump 300) and is riding a wave of enthusiasm across the voter spectrum from young to old, women and veterans alike.
All of this sums up into the earnings outlook for companies because at the end of the day that’s what drives stock prices. We have noted the strong and BTE Q2 earnings for the US, Europe and Japan. We have also highlighted that more important than Q2 numbers is the fact that across the Tri Polar World (Americas, Asia and Europe) the 12 M forward earnings estimates have continued to rise and that suggests we want to Stay the Course.
We note the potential for a very near term US election driven pause in economic activity, particularly on the cap ex and manufacturing front as folks pause orders to assess the electoral outcome. Mini pause maybe – recession? Here’s Ned Davis Research (NDR): “10 recession indicators that have a good track record. Currently, 2/10 are warning. Economy may be slowing...maybe toward recession. But risks of one starting in next 2-3 months seems low”.
As we discussed on this morning’s show with host Lisa Abramowitz there is always a fly in the ointment, the investment picture is rarely if ever perfect, the set up always has question marks around it. In this case the fly, question mark is the behavior of the commodity space which seems out of whack with our positive global economic and hence earnings outlook. This is true whether one looks at the energy space – Nat gas or oil as well as the industrial or base metals space with Dr Copper (thanks Goldman). Its only the shiny stuff, the precious metals, that have sustained an up move. This is true even with global oil inventories at the lowest seasonal levels on record.
The GSG chart looks ugly, under its 50, 100 and 200 day Mav while the AGG chart looks solid and above all three. We are hard pressed to buy the 10 yr. UST under 3.7% and sell copper 20% off its recent high but there is no doubt being OW Commodities and UW FI has hurt this past month or so. We will have more to say on this front next week when we write our Monthly. For now we are watching the USD weaken and wonder whether that could help catalyze a better outlook for the physical asset space.
Wow – we got thru the whole piece and never mentioned yield curve inversion – why – did something happen? Rest up this weekend – next week brings the Harris -Trump debate, the Apple launch party and the Fed meeting to name just a few. But first there is the weekend and there is football, Lets GO DUKE!