“People are always tempted to divide people into us and them.”
-Samuel Huntington
My friend and European Economist/Strategist, Daniel LaCalle, recommended that I go back and read The Clash of Civilizations, by the late Samuel P. Huntington. While it’s a little heavy for lakeside reading, I’m sure glad I did.
Huntington’s 1993 theory about human #behavior (that wars would be fought between cultures, not countries… and that Islamic Extremism would become one of the biggest threats to world peace) was, as they say on the Old Wall, spot on.
Huntington stated simply that “human history is the history of civilizations. It is impossible to think of the development of humanity in any other terms” (pg 40). #Truth. Every day we should be humbled by both the good and bad people do. It all shapes history.
Back to the Global Macro Grind…
Are people always tempted to divide market returns into a game of us vs. them? How about us vs. the market? Unless you’ve never worked a day on Wall Street in your life, the answer to that question is obvious. Everyone doesn’t get a trophy at year-end.
With an over-supplied industry of asset managers battling it out to deliver “alpha” every day, I think it’s glaringly obvious that #process is winning the performance war, not marketing budgets and/or consensus macro tourism.
Another way to think about winning in this game is not to be riding losers. In US Equity Style Factor terms, last week’s losers were the ones you should have been avoiding all year long:
- Sector Risk = Energy Stocks (XLE) down another -2.5% on the week to -17.3% YTD
- Quality (High Short Interest) = down another -2.0% on the week to -4.3% YTD
- Size (Bottom 25% of SP500 market cap) = down another -1.9% on the week to -1.0% YTD
- Growth (Bottom 25% of SP500 EPS growth rates) = down another -1.4% on the week to -0.2% YTD
*Mean performance of Top Quartile vs. Bottom Quartile for SP500 companies
Put simply, if you’re long, smaller, low-quality companies who have been levered to either Reflation’s Rollover or their own organic growth problems… that’s been a big problem.
While it’s entertaining to watch macro pundits who didn’t call for the ramp call for a “summer-time correction” (summer ends next week), fully loaded with a few > 1% down days in the last 2 weeks, the SP500 is only -2.2% from its all-time closing high of 2480.
Wouldn’t it be more helpful to anchor one’s bearish US stock market narrative this way?
A) Reflation’s Rollover continued last week with the CRB Index (19 Commodities) dropping -1.2% to -7.8% YTD
B) Broadening the rollover was a selloff in Ag/Food with Coffee -8.4%, Wheat -5.2%, Cocoa -5.0%, etc.
C) Reflation’s Rollover kept both long-term interest rates and the Financials from going higher…
If you know that the Russell 2000 (down -1.2% last week to 0.0% YTD) has a 26% weight to the Financials, now you know why Reflation’s Rollover is hammering the Russell vs. SP500 weekly and YTD returns (the SP500 was -0.6% last week).
You might even consider sprinkling a “Global Slow-Down” in all things related to “reflation”, adding big macro things like:
A) #ChinaSlowing
B) #EuropeSlowing
That is, of course, unless you’re in the camp that “if China and Europe slows, then the US has to slow.” Notwithstanding that that camp has been wrong, many times, across human history… here was last week’s most important US economic data:
- US Retail Sales Growth #accelerated to +4.2% year-over-year in JUL
- US Industrial Production Growth #accelerated to +2.2% year-over-year in JUL
- US Consumer Confidence #accelerated to 97.6 in AUG vs 93.4 in JUL
I know, I know. This is crazy. This can’t be happening… uh, because of Trump?
#Wrong.
A) It did happen and …
B) None of the US growth bears predicted it would
As a result, as we approach this summer’s end, I think it’s critical to divide us vs. them on that front.
If only because being long big cap, high quality, US Growth is what has differentiated 2017 returns… and the goal of the game is to get that side of the equation right.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.15-2.27% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6195-6430 (bullish)
XOP 28.65-31.04 (bearish)
Nikkei 193 (neutral)
DAX 110 (bearish)
VIX 9.49-16.98 (bearish)
EUR/USD 1.16-1.18 (neutral)
Oil (WTI) 46.30-48.38 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
