Sell Gold and Long-Term Bonds
Simply put, the U.S. economy is accelerating and that's not good for either Long Bonds or Gold. Case in point, yesterday's ISM Manufacturing release hit a 2-year high. This follows recently reported economic data from GDP to Retail Sales to Durable Goods orders that's been better than expected.
If you've been following Hedgeye for a while you might be shocked to see the aforementioned investment conclusions. We had been bullish on Long-Term Treasury Bonds (TLT) since late 2014 and liked Gold (GLD) for much of 2016. But we also told subscribers to sell it all shortly after Donald Trump's Election Day victory. Why this seemingly radical change? It's actually not radical at all but consistent with a fundamental aspect of our research process.
Let's back up a bit. It was our contention in 2014 that the U.S. economy was slowing. It did. U.S. growth peaked in March of 2015 at 3.3% (on a year-over-year basis) and declined to 1.3% in June 2016. Over that period, Gold, Long-Term Treasury bonds, and the Utilities sector (XLU) posted double-digit gains. These typically outperform in a slow growth environment.
Shortly thereafter, the market began betting that the U.S. economy bottomed. The traditional U.S. growth slowing leaders turned into laggards and sectors tethered to an accelerating U.S. economy, like Industrials (XLI) and Financials (XLF), came roaring back. (See our detailed explanation in "Why Trump Didn't Kick-Start the U.S. Economy.")
U.S. Economic Data Hadn't Confirmed Recovery (Yet)
#Economy #GDP #Recession
The market was front-running the U.S. economic data. As the numbers rolled in (just before Trump's victory in early November), however, the data started to rubber-stamp investor's bets:
- Durable goods and Retail Sales data for the month of October began improving.
- Then previously recessionary Industrial Production data started to look up.
- U.S. GDP for the third quarter stopped slowing, rising to 1.7% after five quarters of deceleration from 3.3% year-over-year growth in March 2015 all the way to 1.3% in June 2016.
The ISM Manufacturing report from yesterday is further confirmation. As you can see in the Chart of the Day below, the ISM numbers started to signal that we were lapping the recessionary lows of the Industrial economy back in August.
Take a look at the breakdown of data below:
- August 2016 ISM = 49.4
- October 2016 ISM = 51.5
- September 2016 ISM = 51.9
- November 2016 ISM = 53.2
- December 2016 ISM = 54.7
"In other words, in addition to ISM, Industrial Production, Durable Goods, etc., there’s now plenty of evidence to suggest that the Industrial & Manufacturing #Recession that the US experienced bottomed in August-September 2016," Hedgeye CEO Keith McCullough wrote in today's Early Look. In the fourth quarter of 2016, as the U.S. economy was bottoming, Gold and Long-Term Bonds lost -13.1% and -14.1% respectively.
the U.S. Economy Will continue to Grow...
#GrowthAccelerating (tickers: TLT, GLD)
All of this supports our current research call on U.S. growth accelerating. It's also why investors should now short Long-term bonds (TLT) and Gold (GLD).
Our predictive tracking algorithm suggests U.S. GDP will come in at 1.9% growth in the fourth quarter of 2016 (the Federal government's first estimate will be released on January 27th). Add all this together and we'd expect more carnage for investors in Long Bonds and Gold.