Editor's Note: Below is a brief excerpt from this week's edition of Market Edges (our weekly macro newsletter). Click here to learn more about Market Edges.
As we noted in last week's Market Edges...
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"Right now, roughly 80% of the 46 economies we monitor are tracking in (or towards) #Quad3 (Growth slowing, Inflation accelerating) for Q2. Our forecasts suggest Quad 3 for the U.S. and China, along with the Eurozone and Emerging Markets more broadly. This does not bode well for investors long a "globally synchronized recovery." |
Our risk management models suggest domestic Industrials (XLI) are increasingly at risk of a rollover in global growth momentum, hence our nascent bearish bias there. Here's analysis from Hedgeye CEO Keith McCullough:
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"Don’t confuse Quad 3 (Growth slowing, Inflation accelerating) with a worldwide re-acceleration in demand and/or cyclical growth – at the top-end of the @Hedgeye Risk Range in Industrials (XLI) that’s our #1 U.S. Equity Sector Short." |
Hedgeye Industrials analyst Jay Van Sciver also highlights some of the reasons why we believe Industrials is an attractive sector to be short, particularly heading into 2H18. Want the bottom-up research view on Industrials? Interestingly, it rhymes with our Macro view.
Some of the reasons include:
- Moderating growth
- Higher input costs
- Expectations are out of line for the sector
Additional headwinds include slowing Chinese demand, a strengthening dollar, and lower than expected capex investment from the recent tax bill.
That’s a lot of negatives for a sector already among the S&P 500's worst performers this year.
“It wouldn’t have been rational to expect a big uptick in capex from tax reform, but that’s what was embedded in a lot of the valuations we saw,” Van Sciver says in the clip below.
