Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on 8/8/16 discussing why U.S. growth will continue to slow. It's particularly prescient given the less-than-stellar August U.S. jobs report released a few weeks later. Click here to get the Early Look delivered in your inbox weekday mornings.
“If you want to be the best, you have to do things other people aren’t willing to do.”
I don’t know about you, but I absolutely love watching the Olympics. As a boy (pre internet), I used to write down every medal for every country, comparing my totals to what I could find on TV. I got used to penciling in American Gold. #MaryLouRetton!
Now my 8 year-old son Jack keeps score for me on Google. After Michael Phelps won a record setting 19th Gold last night (I was in bed), that took the American medal count to 12 vs. China and Australia at 8 and 6, respectively.
I am Canadian. We’re in 18th place with 1 Silver and 1 Bronze. But somehow we beat USA’s Men’s Volleyball Team in straight sets yesterday. That was a golden moment for Team Canada. Yes, since we don’t win many golds, we’re in it for the moments!
Back to the Global Macro Grind…
Gold itself got hammered on it, but in what seemed like a golden jobs report moment for American Goldilocks last week, both the SP500 and Nasdaq closed at all-time highs of 2182 and 5221, respectively.
I wrote those down too.
Since I’m short the Nasdaq in Real-Time Alerts right now, that sucked (for me). That said, memories can be short. If you were shorting the all-time highs in most things US Equities in July/August of last year, you were feeling golden come the February 2016 low.
What is American Goldilocks?
- Forget the 2-3-4%, we need GDP of 1% (but definitely not 0%)
- Earnings to “beat” beaten down expectations (and still be negative y/y)
- A Dovish Fed that pretends to be hawkish so they can go back to dovish
- The “but, but… the labor market is good” political narrative
- Stocks and Bonds near their highs for the YTD, at the same time
Yep. Don’t worry. We’re all in the 1% now.
And since our predictive tracking algo for US GDP is around 1% for Q3, why can’t this continue? Especially if the next jobs report goes from “good” to bad again, bonds (and stocks that look like bonds) are going straight back up.
From a US stock market perspective, here’s what I wrote down for last week:
- SP500 +0.4% last week to +6.8% YTD
- Nasdaq +1.1% last week to +4.3% YTD
- Financials (XLF) +1.6% last week to 0.8% YTD
- Tech (XLK) +1.3% last week to +9.9% YTD
- Consumer Discretionary (XLY) -0.1% last week to +4.4% YTD
- Utilities (XLU) -2.7% last week to +17.2% YTD
In other words, it was mostly a hopeful move higher in US interest rates that drove the Sector Style Factor performance last week. Since most macro tourists don’t do the rate of change thing, they saw a “good” jobs report as great. Bond Yields rose on that.
The US Treasury 10yr Yield was +14 basis points on the week to 1.59%. That drove the Financials out of the red, temporarily, for 2016. And it slapped a big correction on the biggest macro gold medal winners YTD (Utilities, Gold, etc.).
The other big thing that continues to manifest is a #StrongDollar move. That’s something we didn’t have wrong last week:
- US Dollar Index +0.7% last week and +2.6% in the last 3 months
- EUR/USD down -0.8% last week and -2.8% in the last 3 months
- British Pound -1.2% last week and -9.7% in the last 3 months
I’m using the last 3 months for our FX view as that’s when we started getting louder on both Gold and the US Dollar winning the Currency War. A big part of this view has been complimented by our Q3 Macro Theme of #EuropeImploding. While the goldilocks narrative is fun for all things American right now, both the UK and Europe are heading into a protracted recession.
I know, I know. #StrongDollar, Strong Gold (+5.2% in the last 3 months) isn’t exactly a panacea for all things “earnings”… Then again, we need to get to Q3 #EarningsSlowing before we see how sweet American Goldilocks is looking come The Fall.
With the pace of non-farm payroll growth slowing to a new cycle low of 1.72% year-over-year in JUL (vs. +2.1% JUL 2015), the probability continues to rise that jobs growth slows to 0%. And 0% isn’t 1%. That won’t even be in contention for bronze.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.45-1.60%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer