“Contradiction insights spark the emotional reaction.”
-Dr. Gary Klein
While “getting off of 0%” with a rate hike (into 2015 #GrowthSlowing) is something that the same crowd that didn’t want a rate hike (into 2013 #GrowthAccelerating) is a classic Wall Street contradiction, it’s consistent. Consensus begs for what it’s positioned for.
As Klein goes on to explain in Chapter 5 of Seeing What Others Don’t, “Contradiction insights send us on the road to a better story. They signal that there’s something seriously wrong with the story we’re currently telling ourselves.” (pg 61)
Fortunately, we humble observers of Mr. Macro Market’s signals have an opportunity to obtain insights into the rate of change in Global Economic Growth & Inflation, every day. The best story you can tell yourself is that you beat consensus.
Back to the Global Macro Grind…
Friday’s -1.6% drop in the SP500 came on massive volume. Total US Equity Market Volume (including dark pool) was up +24% and +26% vs. its 1-month and 1-year averages, respectively. That took the SP500 to -4.9% for the YTD and -8.1% from its YTD peak.
For the week, you might say nothing happened. Especially if you run the place, you can pretty much tell yourself whatever you want. Reality, however, is timestamped, across durations. Here’s last week’s score with a 1-month overlay as context:
- US Dollar Index flat on the week and down -1.9% in the last month
- Japanese Yen up another +0.5% on the wk (vs. USD) and +3.7% in the last month
- CRB Commodities Index -1.3% on the wk and -1.3% in the last month
- OIL (WTI) up another +0.7% on the wk and +4.2% in the last month
- Gold was the biggest macro winner last week = +3.2% on the wk and +2.0% in the last month
- Long-Bond (10yr Treasury) down -5 bps last wk to 2.13% (-6bps in the last month)
- SP500 down another -0.2% on the wk and -6.6% in the last month
- US Financial Stocks (XLF) -2.0% on the wk and -10.4% in the last month
- European Stocks (EuroStoxx600) -0.3% on the wk and -8.6% in the last month
- Emerging Market Stocks (MSCI Index) +3.1% on the wk and -2.4% in the last month
What you see here (on both a 1 week and 1 month duration) is that macro markets look a lot like they did when US and European growth slowed into the back half of 2011. The end of that move capitulated with both Gold and the Long Bond at all-time highs.
There’s plenty of contradiction in how the Federal Reserve depicts the #LateCycle US labor market and the “transitory” nature of both cyclical growth and inflation slowing, globally. At the same time, the market is pricing in something that looks like stagflation.
In other words, for the last month, you’ve made a lot more money:
A) Buying Oil and Gold instead of the US and/or European stock markets
B) Buying Long-term Bonds (and/or stocks that look like bonds) instead of “cheap” Financials
That said, you wanted to have timed the Fed punting on the “rate hike” right. Because being long Oil and Emerging Market related equities would have train wrecked your year. Don’t forget that US Energy Stocks (XLE) are -20.3% YTD.
I certainly hope you have a way to think about it. There’s contradiction in telling your investors that you are super long-term in nature but not completely aware of the super-secular headwinds to both growth and inflation, from a demographic perspective.
How about sentiment?
Building #behavioral models to help contextualize when consensus is positioned for reality (as opposed to fighting for the positions they’ve already built up – like “Long Financials because we have to raise rates eventually”) is also critical.
There are plenty of indications in non-commercial futures/options positioning that suggest that consensus is now bearish on growth. This typically happens AFTER market moves:
- SP500 (Index + Emini) net SHORT position hit its highest of the year last week at -240,720 contracts
- US Dollar net LONG position dropped another -13,666 contracts to its lowest of the year at +39,364 contracts
In other words, as US growth slows, both the US currency and equity market positioning reflect both the fundamentals and our proprietary signal (both USD and SP500 are signaling bearish on both our TRADE and TREND durations).
That’s why, from a Style Factoring perspective, if all you’ve done in the last 3 months is downshift your portfolio’s Equity Beta (i.e. sell your cyclical and chart chasing betas), you’ve beaten most of your competition.
Here’s how “Low-Beta” (mean performance of the Top Quartile in the SP500 vs. the Bottom Quartile) has performed:
- One-week duration = +1.1% (vs. High Beta -0.6%)
- One-month duration = -4.7% (vs. High Beta -6.0%)
- Three-month duration = -2.3% (vs. High Beta -13.7%)
Yes. The performance lessons of the last 3 months are more obvious than the last month. But my point here is that even if you missed shifting your portfolio 3-6 months ago, you could have reset and beat consensus in the last month anyway.
Sometimes there’s 0% contradiction in sentiment being bearish, when it should be.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.11-2.21%
Oil (WTI) 43.48-48.71
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer