The stock market bears have come out of hibernation. After the Nasdaq fell almost -2% on Friday, here are some of Bloomberg's top "Markets" headlines:
- Tech Selloff Spreads After Friday’s Rout
- Trump Bump in U.S. Growth Forecasts Finds Its Limits
- Bond Market Doomsayers Sound Alarm
Conspicuously absent from the above is any mention that the Russell 2000 finished Friday at an all-time high. "With time and space comes what we call market corrections," writes Hedgeye CEO Keith McCullough in today's Early Look.
Tech's selloff is a counter-trend move. Consider the numbers. The S&P 500 and Dow are up 8.6% and 7.6% respectively year-to-date. Meanwhile, inclusive of Friday's selloff, the Nasdaq is up 18% this year.
Wall Street consensus has missed this and so much more in 2017. For some time now, our call has been to buy Tech shares (XLK) and stay away from anything tethered to commodity prices like Energy (XLE). That's been a winning recipe this year, with Tech up +15.8% year-to-date, leading the S&P 500's sectors, and Energy down -11.8%, leading the losers.
If you've missed the move in both thus far, Friday offered a nice entry point. Tech shares were off -2.5% while Energy shares were up 2.4%. Simply put, "Last week was what we call a counter-TREND move in real growth vs. reflation," McCullough writes.
Why Will the Tech Rally Continue (And Energy Underperform)?
What's next for Technology and Energy stocks? "To get your asset allocation right, you need to get the trending year-over-year rates of change in both growth and inflation right," McCullough writes. So here it goes.
TECHNOLOGY: We think Technology stocks will continue to outperform because U.S. economic growth is accelerating. We updated our predictive tracking algo for recent data and are taking up our Q2 US GDP forecast to +2.35% year-over-year growth which imputes +2.66% quarter-over-quarter GDP SAAR. As you can see in the Chart of the Day below, our GDP estimates continue to rise throughout the balance of 2017.
ENERGY: We think Energy stocks will continue to underperform because U.S. inflation is falling. The Consumer Price Index has fallen from 2.8% in February to 2.2% in April. Expect inflation to continue to fall throughout 2017 since we've now lapped the easiest year-over-year compares (i.e. when commodity prices were bombed out in 2016).
Bottom Line
So stick with what's worked throughout 2017. The macro trends that have boosted Tech and smashed Energy shares will persist throughout the remainder of the year.
