“Pain + Reflection = Progress.”
-Ray Dalio
As Dalio goes on to write in Principles, we should “go to the pain rather than avoid it” (pg 153). Having made many, I think learning from losses is one of the biggest parts of this game. If we have the capacity to evolve, we learn faster.
We spent the last few days in Toronto, Ontario meeting with Institutional Investors. Not only were we impressed with the sophistication of this group of investors, we learned plenty about how they think about global asset allocation.
Since our GDP and inflation forecasts update daily, Day 2 in Toronto was where we were able to reconcile part of the recent move to all-time highs in the NASDAQ and Russell 2000 with US GDP Growth ticking higher, again.
Back to the Global Macro Grind…
On the heels of #accelerating US Consumption, Jobs and ISM Services reports, here’s the real-time update from our proprietary US GDP predictive tracking algorithm:
- Our year-over-year nowcast for Q218 ticked up to +2.82%
- That imputes a headline Q2 GDP (q/q SAAR) nowcast of +3.03%
There are more than a few risk management points to consider when contextualizing these #accelerations:
- When US Growth #accelerates, US Growth continues to outperform!
- When both GROWTH and INFLATION are #accelerating at the same time we call that Quad2
- Quad2 is where bond yields rise and Bond proxies under-perform
- A +3.03% headline GDP print will be hawkish when reported alongside > +3% headline inflation prints
- Fed Fund futures got way too dovish on last week’s Italian move relative to the US economic data that’s pending
All of this was confirmed by the best strategist on Wall Street (Mr. Market) yesterday:
- Bond Yields continued higher and remain Bullish TREND @Hedgeye
- Financials (XLF) led the rally closing +1.8% on the day
- Utilities (XLU) led losers closing down another -2.4% on the day
Not only did Utes (XLU) lead losers, it was the only Sector Style in the Top 10 that was actually DOWN on the day.
At down -8.2% for YTD, everyone who is under-weight and/or short Utes and Consumer Staples (XLP is down -12.3% YTD) has a lot less pain and reflection to deal with than those who are long of what they should be when the economy is in Quad 2.
This, of course, is where it gets really interesting though because within the next 3-6 months we have the US economy entering Quad 4 (where both GROWTH and INFLATION #slow from their current cycle peaks).
Quad 4 is where you buy things like Treasuries, Utes, and Consumer Staples (or bond proxies). So that’s where most of the debate our clients are having with us is centered on right now.
Especially when it comes to Canadians, most investors want to go to where the puck is going as opposed to chasing where it’s been. So… “when do you make the pivot?”
A: When we’re actually in Quad4 in TRENDING reported data terms and/or when
B: Mr. Market starts to signal that he’s starting to discount that economic Phase Transition
Obviously a market that continues to signal higher-all-time-highs in 2 of our favorite US Sector Styles for Quad 2 (Consumer Discretionary and Tech) is a market we have the humility to obey.
No raging bull market in US growth stops going up on “valuation.” It stops going up when growth stops accelerating and the economy undergoes a Phase Transition into either Quad 3 or Quad 4.
For recent evidence of what happens to equity exposures when countries go from 1 to 2 years of Quad 1 and 2 into Quads 3 and 4, see Chinese Stocks, European Stocks, and Emerging Market Stocks! Pain + Reflection = #Process progress.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.77-3.05% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
VIX 11.01-16.99 (bearish)
USD 93.11-94.75 (bullish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 63.29-71.45 (bullish)
Nat Gas 2.85-3.02 (bullish)
Copper 3.01-3.29 (neutral)
Corn 3.72-3.95 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
