GLOBAL GROWTH STABILIZES SOME MORE

Takeaway: Both our fundamental RESEARCH and quantitative RISK MANAGEMENT signals support our #GrowthStabilizing theme.

SUMMARY BULLETS:

 

  • Both our fundamental RESEARCH and quantitative RISK MANAGEMENT signals support being increasingly allocated to equities in lieu of Gold and Treasuries.
  • Turning to some key economic indicators, we’re seeing this potential GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total across both the Services and Manufacturing sectors) and a global uptick in manufacturing activity in the month of DEC.
  • Financial market indicators are singling #GrowthStabilizing as well. In recent Early Looks, Keith has been vocal about the multitude of bullish quantitative RISK MANAGEMENT signals he’s been receiving from various asset classes – particularly Bullish Formations across a variety of global equity indices and bearish breakdowns in assets like Gold and US Treasury bonds.
  • Additional financial market indicators, like sovereign 10YR-2YR spreads – which we view as key leading indicators for GROWTH across most developed markets – confirm the fundamental signals as well. US, German, Chinese and Japanese nominal yield curves are all widening relative to their late-NOV/early-DEC lows.
  • All that being said, we continue to hold the view that global GROWTH is indeed on the mend, but not necessarily returning to prior peak rates of economic activity that we’ve seen on a trailing three-to-five year basis – at least not in the near term. This signal is being confirmed by similar moves and relative levels across other financial market indicators from around the world, such as China’s rebar and iron ore markets.
  • Moreover, measures of implied volatility are indeed at dangerous levels from a forward-looking perspective as it relates to various macro markets and global economic data is likely to have an increasingly difficult time surprising to the upside as it has in recent weeks.
  • So what does one do with all of this? Quite simply, we find it prudent for investors to continue to fight the urge to sell and/or get short for contrarian’s sake at the current juncture. As we mentioned before, the data isn’t great, but data that’s better-than-bad should continue to provide a floor under market prices of various “risk assets” – for now.

 

As part of our rigorous fundamental RESEARCH process, we track literally hundreds of economic and financial market indicators across four key economic blocs globally: US/Canada, Europe, Asia Pacific and Latin America. Moreover, we model the GROWTH and INFLATION statistics from dozens of countries with a predictive tracking algorithm that backtests in the 82-89% range, depending on the data set.

 

The vast majority of the time, nothing really jumps off the pages of our notebooks, nor is it actionable or critical enough to write a research note about. Over time however, we are able to form a unique perspective of broader trends – particularly as it relates to global GROWTH, INFLATION and POLICY, which we find the confluence of the three to be the key driver of asset class rotations. Right now, that process continues to confirm our overarching conclusion of #GrowthStabilizing.

 

Turning to some key economic indicators, we’re seeing this GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total across both the Services and Manufacturing sectors). For the month of DEC, the median PMI reading came in at 50.7; while down from the 51.4 reading we saw in NOV, this amalgamated metric still falls above the 50 level designed to diffuse sequential expansions from contractions.

 

GLOBAL GROWTH STABILIZES SOME MORE - 1

 

Broadly speaking, the service sector continues to outperform manufacturing, as it has done since mid-2011. We hold the view that this is largely a function of the decline in commodity prices over that period (commodity-related CapEx declines layered on top of a consumption tailwind). Still we are encouraged to see the global Manufacturing PMI resurface above 50 for the first time since MAY ’12.

 

GLOBAL GROWTH STABILIZES SOME MORE - 2

 

Recall that our 12/7 note titled, “AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM?” introduced a lot of these same fundamental RESEARCH signals. Flagging critical deltas – large or small – in real-time is something we always strive to do as part of our process.

 

Moving along, financial market indicators are singling #GrowthStabilizing as well. In recent Early Looks, Keith has been vocal about the multitude of bullish quantitative RISK MANAGEMENT signals he’s been receiving from various asset classes – particularly Bullish Formations across a variety of global equity indices and bearish breakdowns in assets like Gold and US Treasury bonds.

 

Additional financial market indicators, like sovereign 10YR-2YR spreads – which we view as key leading indicators for GROWTH across most developed markets – confirm the fundamental signals as well. US, German, Chinese and Japanese nominal yield curves are all widening relative to their late-NOV/early-DEC lows.

 

GLOBAL GROWTH STABILIZES SOME MORE - 3

 

Note that each spread is well shy of prior peaks – a clear signal in our model that global GROWTH is indeed on the mend, but not necessarily returning to prior peak rates of economic activity that we’ve seen on a trailing three-to-five year basis – at least not in the near term. This signal is being confirmed by similar moves and relative levels across other financial market indicators from around the world, such as China’s rebar and iron ore markets.

 

GLOBAL GROWTH STABILIZES SOME MORE - 4

 

Moreover, measures of implied volatility are indeed signaling broad-based investor complacency, suggesting that spot prices of downside protection are at dangerous levels from a forward-looking perspective as it relates to various macro markets. Recall that the last time we were getting loud about this was back on MAR 29th (“DEFINING ASYMMETRY: INVESTOR COMPLACENCY AT MULTI-YEAR LOWS”); the S&P 500 Index (as a rough proxy for “risk assets” – whatever that implies) corrected almost -10% from its APR 2nd cycle peak to its JUN 1st cycle lows shortly after the publication of our note.

 

GLOBAL GROWTH STABILIZES SOME MORE - 5

 

Additionally, global economic data is likely to have an increasingly difficult time surprising to the upside as it has in recent weeks.

 

GLOBAL GROWTH STABILIZES SOME MORE - 6

 

So what does one do with all of this? Quite simply, we find it prudent for investors to continue to fight the urge to sell and/or get short for contrarian’s sake at the current juncture. As we mentioned before, the data isn’t great, but data that’s better-than-bad should continue to provide a floor under market prices of various “risk assets” – for now.

 

At a different TIME and PRICE from today, however, that will certainly change – most likely ahead of the late-FEB debt ceiling showdown. There’s a lot SPACE between now and then for investors to underperform, however. The last thing you’d want to do here is ignore the fundamental RESEARCH and quantitative RISK MANAGEMENT signals by shorting this market – which could conceivably force people to cover higher, potentially just shy of all-time highs (US equities).

 

Alas, timing remains a critical input is this game we play – especially when all of the signals aren’t necessarily singing the same song at the same time.

 

Darius Dale

Senior Analyst


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