"Do the difficult things while they are easy and do the great things while they are small."
-Lao Tzu
It hasn't been the best start of the year for those of us that came into the year bearish. Sure, the last couple of days have helped, but the reality remains the equity markets are up on a rope to start the 2023 stock market season.
Now, of course, this rally comes after stocks got beat like rented mules to end 2022 and we are just back to the levels of September 2022, but it has been a rally nonetheless. This game is never easy, but if you put in the work and follow your process ... good things will eventually come.
The benefit of a go anywhere strategy is that within your portfolio you should have "bets" that work within different environments. In fact, at the moment we have 20+ different Macro positions in our “Top Macro ETFs By Rank". (This is delivered every morning to Macro Pro and Institutional subscribers.)
Currently, this list of ETFs includes: IIGD, TLT, EWH, GLD, UUP, ENZL, IEF, KWEB, SLV, EEM, GDX, BTAL, SIL, GDXJ, GRID, RAYC, ITA, EPU, URA, EPHE, WNDY, SQQQ, EWS, and VIG.
The later two, EWS and VIG, Keith added intraday yesterday and they are representative of the “go anywhere” investment strategy. EWS is the iShares Singapore ETF and VIG is the Vangard Dividend Appreciation Index Fund. These probably aren’t positions that your myopically focused Old Wall Strategists are talking about.
Ultimately, the success of the 2023 season for your portfolio will be determined by a smaller subset of your decisions in any year. The Pareto Principle is probably a decent concept to apply here. For those that don’t know, the Pareto Principle postulates that “for many outcomes, roughly 80% of consequences come from 20% of causes (the “vital few”).”
There is actually a fairly robust mathematical demonstration of this principle, which I won’t get into today. But intuitively it makes sense. If you get that smaller subset of vital decisions correct at work, in life or in markets . . . you are likely to see disproportionate positive outcomes as a result.
Back to the Global Macro Grind...
Part of my job every day is to highlight and contextualize the most important global macro data from the last 24 hours. This week has been a bit light on that front, but there are a few points to flag over the last week.
First, we have had a series of global inflation readings, particularly in Europe that have either remained flat sequentially or accelerated. A few examples of this are as follows:
- Netherlands January CPI was flat sequentially at 7.6% Y/Y;
- Germany Preliminary January CPI accelerated slightly to +8.7% Y/Y, from +8.6%;
- China January CPI accelerated to +2.1% Y/Y, from +1.8%; and
- South Korea January CPI accelerated to +5.2% Y/Y, from +5.04%.
Certainly, there have also been data points that support a slowing of inflation in the last week, but those are four fairly large economies in which inflation has re-accelerated. Intuitively it makes sense that we would see some re-acceleration of inflation because it takes time for inflation to move through the system. As well, many global economies remain very tight from a labor perspective.
This gets to my second call out this morning, which is the U.S. labor market. Despite an intense regime of tightening and dramatic decline in many “soft” economic indicators in the domestic economy, the U.S. labor market remains very tight. Consider two data points we’ve received on U.S. employment in the past week:
- Last Friday, Non-Farm Payrolls almost doubled month/month to +516K and crushed market expectations. While there were some classification reasons for this, it doesn’t change the fact that on some level the U.S. labor market got incrementally stronger in January.
- Weekly Jobless Claims further support this and came in at +196K and Continuing Claims were at +1.7MM, which both remain near secular (if not generational) lows. On the weekly claims front, they have been improving steadily since a late November peak of +241K.
The challenge with a tight labor market is that it is difficult to sustainably get the demand side of the inflation equation down. And the reality is with national unemployment at +3.5% (lowest in 54 years), the consumer demand side of the equation remains somewhat intact.
Admittedly, global central banks are in a bit of a box because of these dynamics of high, sticky inflation and almost full employment. It is almost a foregone conclusion that if financial conditions get tighter, or remain tight for an extended period, unemployment is likely to increase.
In fact, Chair Powell said as much this week when he noted that “the job market’s strength and the persistence of inflation pressures means that the Fed will need to keep raising its benchmark interest rate this year”. (This isn’t actually a direct quote from Powell, but rather from a news article that covered his speech, but you get the point.)
So as you think about getting the 20% of your decisions correct that will have the most impact, it might be time to start shifting focus from the myriad of inflation readings and focus on labor. Ultimately, as the Fed itself is telling us, that may be the indicator that informs us as to when rates start going lower. At the moment, especially with unemployment at 54 year lows, we likely aren’t close.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.51-3.79% (neutral)
UST 10yr Yield 3.34-3.76% (neutral)
UST 2yr Yield 4.18-4.62% (bullish)
High Yield (HYG) 74.77-77.10 (bearish)
SPX 3 (bearish)
NASDAQ 11,216-12,209 (bearish)
RUT 1 (bearish)
Tech (XLK) 132-144 (bearish)
Defense (ITA) 112-116 (bullish)
Gold Miners (GDX) 29.02-33.11 (bullish)
Shanghai Comp 3211-3306 (bullish)
Nikkei 27,147-27,793 (bearish)
VIX 17.99-21.84 (bullish)
USD 101.24-104.26 (bullish)
Oil (WTI) 73.01-80.35 (bearish)
Nat Gas 2.26-2.80 (bearish)
Gold 1 (bullish)
Copper 3.94-4.31 (bullish)
Silver 21.58-24.44 (bullish)
Bitcoin 20,098-23,871 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
