“The best qualification of a prophet is to have a good memory.”
-George Saville
I’m, as Willie Nelson sings, “on the road again”… seeing Institutional Investors in Kansas City, Denver, San Francisco, and Los Angeles this week. The debates Darius Dale and I have had with thoughtful portfolio managers and analysts are priceless.
The way a meeting with us generally goes is we hand out an eighty-four slide deck that includes A) an outline of our Global Macro #Process and B) the quarterly Macro Themes that are born out of that data driven process.
We don’t start meetings talking about how the economy “feels” or what people were saying at dinners we host. We don’t prophesize on what markets should be doing either. Like many buy-siders, we’re squarely focused on what the data and markets are already doing.
Back to the Global Macro Grind…
One of the best qualifications of a great analyst is to have a good historical understanding of the base effects. What are the base effects? Put simply, they are economic and market history. In order to understand them, you need to study them, deliberately.
While the research we do is far more boring than prophesizing qualitatively about investor mood in Milan, in terms of repeatable #process, it ends up being far more accurate than being a macro tourist.
To be clear, the macro tourism industry on Wall Street is booming. Since many investors have been run over by obvious macro TRENDs in the last decade, they entertain more macro opinions than ever before!
Consensus Macro opinions tend to have short memories. Contextualizing short-term moves within intermediate to long-term cycles is what provided all of us tremendous opportunities to not only save and make money in 2017, but to beat our competition.
Here are some Consensus Macro opinions we consistently run into:
- “This is a globally synchronized recovery”
- “The US profit cycle has been impressive”
- “US tech stocks are so expensive”
Our response:
- GLOBAL GROWTH: Looking backwards, 2016 and early 2017 was a globally synchronized #acceleration – in Q2 and Q3 of 2017 we’ve started to see Synchronized Global #Divergences, with China and some Southern European countries (Italy and France) #slowing
- EARNINGS: In rate of change terms, after comparing against 5 consecutive quarters of DOWN earnings (as you can see in today’s Chart of The Day, SP500 earnings were down, on a year-over-year basis from Q2 of 2015 to Q2 of 2016), calling for US profits to #accelerate in 2017 was the easiest base-effect call we made … but you shouldn’t expect it to continue in perpetuity
- VALUATION: with bears, I remind them that valuation is not a catalyst until growth slows; with bulls I generally have a much happier meeting (mainly because they’re having a crusher of a year) but I remind them that Tech Earnings should start to slow in Q1 of 2018
Put simply, if you have a good memory and have studied market history, you’ll respect the reality that as growth accelerates, you tend to get multiple expansion – and when growth slows, you tend to get multiple compression.
Top down, we don’t have US GDP growth slowing in Q3 and Q4 of 2017. On a year-over-year basis, we still have it #accelerating. Bottom up however, S&P 500 Earnings Growth should slow (in rate of change terms) in Q3 and Q4 from the 1st half of 2017’s profit cycle peak.
Looking at the base effects, Q3 will have STEEPENING base-effects (tougher compares) in 9 of 11 S&P 500 Sectors. Looking at the base-effects for Tech in particular (S&P 500 names), here’s what the reporting period will be up against versus the year prior:
- Q2 of 2016 was a -3% comp
- Q3 of 2016 is a +6% comp
- Q4 of 2016 is a +12% comp
- Q1 of 2017 is a +22% comp!
So, if you have friends or foes who need a reason to stay bearish on US Growth “multiples”, send them this note and tell them to tell their investors to just hang in here for another 3-6 months…
That’s when the 2017 profit cycle #accelerating (very hard data) they missed will be a massive year-over-year hurdle to compare against. In the meantime, I’ll be waiting on my market prophet, Mr. Macro Market, to opine on when this risk matters. We meet daily.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.27-2.39% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
XOP 32.25-34.64 (bullish)
RMZ 1146-1166 (bearish)
VIX 9.11-10.76 (bearish)
GBP/USD 1.30-1.35 (bullish)
Oil (WTI) 49.26-52.72 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
