“We will be modern but we won’t be you.”
-Samuel Huntington
That’s a great all-encompassing one-liner from one of the great Global Macro books you should study: The Clash of Civilizations (and the remaking of the world order), by the late Harvard History guru, Samuel Huntington.
Huntington died when what I’ll call Modern Macro started, in 2008. For those of you who did well in macro markets in 2008, you nailed one very simple trending macro factor: #GrowthSlowing. You also had the discipline to not buy stocks too early on “valuation.”
Today’s under-performance in the asset management realm is largely explained by the opposite direction of that causal GROWTH factor. If you’ve been short US growth on “valuation”, you haven’t bought into our Modern Macro model which simply reminds you that “expensive” gets more expensive during a trending, multi-quarter, Phase Transition to US #GrowthAccelerating.
Back to the Global Macro Grind…
So much for the super short-term head-fake signal of “lower-highs” for the Nasdaq. Those happen. Sometimes they change, quickly. And when they do, I change with them. On the heels of the following rip-roaring US #GrowthAccelerating data this week:
A) US Consumer Confidence Present Conditions = New Cycle Highs for AUG of 151.20
B) ADP US Employment reports continue to #accelerate on a trending basis
C) US GDP rings pavlov’s #GrowthAccelerating bell with a +3% headline q/q SAAR for Q217
The Nasdaq ramped into August month-end to close at a fresh all-time closing high of 6428. For those of you keeping score in your portfolios, that made what’s been an allegedly “expensive” Nasdaq more expensive at +19.4% YTD.
For those who’d like to have a factual discussion about what’s “cheap” vs. “expensive”, on slide 39 of our current Q3 Macro Themes deck we have today’s Chart of The Day, which shows quite clearly that Tech is nowhere near as expensive as it can be.
Since Einstein taught the Modern Macro Free Folk that everything is relative, here’s where some NTM (next twelve months) P/E Multiples are relative to themselves, looking back 30 years:
- Tech stocks are in the 62% percentile
- Consumer Staples are in the 97% percentile
- Energy stocks are in the 93% percentile
Put another way, if you’re really a valuation expert who uses history as his/her guide and has the discipline to not over-pay for equity exposures, two of your US Equity Sector underweights in 2017 should have been what have become 2 of the worst performing sectors:
A) Energy Stocks (XLE) are down -16.4% YTD
B) Consumer Staples (XLP) are only +5.8% YTD
Of course, it would have helped to have a Global Macro Research #Process to see Reflation’s Rollover coming (Energy Stocks) and the ongoing acceleration in US real growth data (when slow-growth Consumer Staples stocks aren’t where you’d want to be).
That said, I don’t see a lot of Old Wall macro research writing about it this way. Maybe they don’t do Modern Macro? And that’s totally cool with me. The longer our competition doesn’t evolve, the better.
Another thing to consider this morning is the MOST EXPENSIVE Sector in the US Stock Market relative to where it’s been for the last 30 years, and that is Utilities (XLU). Utes are in the 99th percentile of their historical NTM P/E. Why?
- Reflation’s Rollover => Dovish Fed => Down Dollar => Down (10-30yr) Rates
- Utilities (XLU) +13.2% YTD vs. Financials (XLF) +6.2% YTD on that long-term rates move
- Charts “look good” and both realized and implied volatility for XLU is at historical lows
If and when what’s become the Consensus Macro narrative and position (Reflation’s Rollover) shifts to a consensus breakout in REAL #GrowthAccelerating expectations, the US 10yr Yield could start to put in a series of higher-all-time-lows.
Rising long-term rates (which you should get if we get US wage #GrowthAccelerating) from this 2.10% level in the UST 10yr could not only spark the beginning of the end of Utes (XLU) outperforming Fins (XLF), but “growth” vs. “value” too.
Don’t forget that 26% of the Russell 2000 = Financials (i.e. “value”). While they’re in the 78th percentile of where they’ve been historically, Financials are more expensive than Tech right now. But they’re cheaper than Energy, Staples, and Utilities!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.10--2.21% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
XOP 29.00-30.40 (bearish)
VIX 10.13-13.23 (bearish)
EUR/USD 1.16-1.20 (neutral)
Oil (WTI) 45.67-47.70 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
