“We saw a bunch of names we liked on sale, so we were buyers on December 24th.”
-Anonymous PM on the Bloomberg Surveillance podcast 7/11/19
Nice trade! From that December 24th low, the US equity market in S&P 500 terms is up +28.2%, having closed last Friday at a new record high of 3,014. Kudos to that PM for bucking up and sticking with his valuation-centric process and putting capital to work when it was likely hardest to do so emotionally.
I apologize to said PM for the slight hint of sarcasm in that statement. With all due respect to him or anyone else whose fund is tonning it in 2019 – and many are according the data – but I am always turned off when I hear tall tales of heroic bottom-ticking without any context of either their investment views or performance heading into the event. I was shocked, to say the least, to hear no mention of how the fund performed in Q4.
Where did the spare capital come from that enabled him to buy those lows? Equity fund outflows have been deep and persistent for several quarters now. At any rate, I just wanted to call that discussion out as an opportunity to remind you that we can all learn a lot [more] from having an open and honest discussion that isn’t centered on marketing/making excuses for good/bad performance.
Back to the Global Macro Grind…
Welcome to another summertime Macro Monday @Hedgeye! For those of you who are new to our measuring and mapping #process, on the first day of every week we review weekly macro moves within the context of the intermediate-term TREND in either the market signal itself, the fundamentals, or both.
First, let’s start with the FX market:
- Our #PeakUSD theme gathered steam last week with the US Dollar Index down -0.5%, leaving the greenback down -1.4% from its 4/25 peak
- The EURUSD cross rallied +0.4% last week and is up +1.3% from its 5/30 low
- The USDJPY cross declined -0.4% last week and is down -5.8% from its 10/3 high of 114.53
- The USD declined a full -0.7% vs. the CHF last week and is down -3.8% from its 4/24 peak
- The AUD rallied +0.6% vs. the USD last week and is up +2.6% from its 6/17 low
- Bitcoin, which is getting smoked today (down -13%) on Trump’s display of disdain for the cryptocurrency, rallied +7.9% last week vs. the USD… it’s still down -36.2% from its 12/18/17 all-time high
It’s interesting to see the DXY peaked in late-April. Since then we’ve had global industrial recession concerns ratchet up amid a re-risking and de-risking of ongoing US-China/Europe trade tensions. The dollar not going up in the face of all that is suggestive of the view that the global economy may find its first signs of stabilization since global growth started broadly decelerating at the start of 2018.
What’s not suggestive of that view is the performance of global equities last week:
- China’s Shanghai Composite Index DOWN -2.7%
- Japan’s Nikkei 225 Index DOWN -0.3%
- Germany’s DAX Index DOWN -2.0%
Chinese and German equities peaked when the consensus hype around a “Globally Synchronized Recovery” peaked in January of last year. Since then, the SHCOMP and DAX are down -17.7% and -9.1%, respectively.
In contrast to the S&P 500 and NASDAQ, which celebrated new all-time highs this weekend, the Russell 2000 was denied entrance to last night’s John Legend concert at Surf Lodge out in Montauk, closing last week down -0.4%. The Russell is a ~20bps decline away from returning to correction mode, down -9.8% from the all-time high it registered last summer.
The best performing sector of last week, Energy (XLE), rallied itself out of crash mode to close up +2.1% and is now “only” down -18.3% from its 5/21/18 high. Relative performance across sectors was as mixed as we’ve seen in a while:
- After Energy, US equities were paced by Consumer Discretionary (XLY), Communication Services (XLC) and Tech (XLK), which closed UP +2.0%, +1.6%, and +1.5%, respectively
- Healthcare (XLV) led losers on regulatory concerns, closing DOWN -1.4%
- Materials (XLB), REITS (VNQ), and Utilities (XLU) rounded out the other sectors that were down on the week at -0.9%, -0.2%, and -0.1%, respectively
We saw an interesting flip in the performance of core US equity style factors as well:
- HIGH Debt (+0.8%) outperformed LOW Debt (+0.6%) on Friday, bucking the six-month TREND of underperformance (+12.3% vs. +18.4%)
- HIGH Short Interest (+1.2%) more than doubled the return of LOW Short Interest (+0.5%), narrowing its six-month underperformance spread to +9.7% vs. +19.2%
- LOW Market Cap (+1.1%) more than doubled the return of HIGH Market Cap (+0.5%), narrowing its six-month underperformance spread to +5.3% vs. +16.9%
In today’s Chart of the Day, you can readily see Friday’s performance as a counter-TREND bounce across each of the seven principal style factor categories we track. It’s far too early to tell whether or not this is the start of a new TREND, but the one thing I will say is that #Quad1 is realistically the only GIP Model regime where levered, high beta, slow-growth names can outperform consistently. To be clear, we don’t have a #Quad1 view here in 3Q19E.
Fixed income markets were equally confounding last week:
- 2yr Treasury Yield DOWN -1bps last week to close at 1.85%
- 10yr Treasury Yield UP +9bps last week amid a backup in global rates (e.g. 10yr German Bund +15bps, 10yr JGB +4bps, and 10yr Gilt +10bps)
- Every economists’ favorite recession indicator found a little reprieve, with the 10y3y Yield Spread widening +17bps last week to the highest level it’s been since mid-May; it’s back down at -4bps this AM
- High Yield OAS widened +5bps to 371 basis points
All told, last week was a confusing week indeed RE: #Quad3 or #Quad4 in the US and #Quad4 or #Quad1 globally. This week Q2 earnings season kicks into full force here in the US, where we’ll also get two of the most important high-frequency economic updates in the form of Retail Sales and Industrial Production for the month of JUN. Perhaps the data will have more answers than I do this morning.
One thing is for sure though – we’ll be 100% accountable for our performance, good or bad.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.94-2.16% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8007-8265 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 215 (bearish)
DAX 124 (bullish)
VIX 12.00-16.30 (neutral)
USD 95.52-97.31 (neutral)
Oil (WTI) 55.63-61.37 (bearish)
Gold 1 (bullish)
Copper 2.63-2.74 (bearish)
Keep your head on a swivel,