As we noted in last week's Market Edges...
"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:
"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.