“We are not won by arguments that we can analyze, but by tone and temper.”
-Louis D. Brandeis
Whoever shorted the US stock market because they hate Trump isn’t going to get paid (again) this morning. I can’t count how many times I’ve suggested that investors check their political baggage at the door, but it’s probably enough times to hate too.
If you’re not long US growth, that is…
Amidst consensus arguing about the “timing” and “details” of the Trump Administration’s new plans, markets have been won over by the economic and profit growth data accelerating. Don’t hate the new all-time highs this morning – show them some respect!
Back to the Global Macro Grind…
I spent the last 2 days meeting with Institutional Investors in Washington, D.C. and Baltimore, Maryland. While the tone of investors has definitely changed, positioning hasn’t. Consensus is clearly not Bullish Enough.
Bullish Enough on what?
- US GDP Growth Accelerating to what should be seen as a +4% handle (q/q SAAR) in Q2
- US Inflation Accelerating to what will likely be close to a +3% handle in the coming months
- US Profit Growth Accelerating to its fastest pace in years during Q1 Earnings Season (reported in Q2)
On that last one, given the US #Recession in corporate profit growth is the “compare”, while I surprise some investors with what year-over-year earnings growth will look like in a major S&P Sector like the Financials, I think people quickly get my point.
You see, especially with most people I meet with being “bottom-up” stock pickers, they get the math on “accelerating against easy comps” (comparative period year-over-year). Not all of them “believe me” though that Trump can have a +4% GDP print.
That political consensus is the asset of the bull in US growth exposures inasmuch as it is tasty fish for Long Bond Bears as this puts the Federal Reserve squarely behind the curve on rate hikes.
Post a trifecta of Fed Heads going hawkish yesterday (Dudley, Williams, and Harker), here’s what Fed Fund Futures did:
- Probability of a March rate hike spiked to 80% this morning!
- Probability of a March rate hike was only 52% yesterday
- Probability of a March rate hike when I highlighted this 2 weeks ago was only 34%
Hoowah! And last week people were pinging me on “Treasuries, Utes, and Staples, breaking out”? When I say consensus isn’t Bullish Enough on either growth expectations or anything that’s born out of that, that’s what I’m talking about.
Especially after market “down days” (SP500 has had 3 of those in the last 15 trading days) you can also consider where consensus is at looking at implied volatility premiums and/or discounts:
- The 30-day implied volatility premium for the SP500 has ramped to +64%
- The 30-day implied volatility premium of the Nasdaq has ripped to +86%
- The 30-day implied volatility premium for Consumer Discretionary (XLY) has ramped to +55%
That’s a lot of ripping and ramping isn’t it? That’s what happens when risk managers are constantly trying to “hedge” or “protect” against what many of them have believed to be inevitable – a Trump correction and/or crash.
What’s crashing, to the upside, is the economic data:
- US Consumer Confidence for FEB ripped/ramped to new highs of 114.8 vs. 111.6 in JAN
- Chicago PMI for FEB ripped/ramped to 57.4 in FEB vs. 50.3 in JAN
- US Durable Goods Growth (ex-aircraft + defense) was positive (+2.1% y/y) for the 4th straight month
Sure, some of the housing data hasn’t been as hot as consumer confidence has been. But, guess what? Given my rates view, I don’t like housing from here… so I’ll get over that.
The more interesting idea is to buy Consumer Discretionary – especially rich people. At this time last year, I was short rich people. That worked because:
A) When US growth slows …
B) And profit growth goes negative…
C) And the stock market is going down, hard…
Rich people don’t get paid like they will when growth is accelerating alongside the profits of their businesses (and the stock market goes up another +3.7% in FEB alone).
On the profit growth scorecard, 480 of the 500 S&P500 companies have reported aggregate EARNINGS growth of +5.9% year-over-year. That’s the highest growth rate of the reporting period. And it’s only going to accelerate from there next quarter.
If you have friends (or Wall Street Strategists) who are hating the highs, tell them to tone it down. Dollar Up, Growth (Rates) Up, Stocks (and Profits) Up. It’s not cool hating on that.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.31-2.52%
SPX 2
RUT 1
NASDAQ 5
VIX 10.91-12.99
USD 100.60-101.85
Oil (WTI) 53.15-54.85
Gold 1
Copper 2.66-2.81
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
