“Big news causes big market action and that action concentrates in small slices of time.”
-Benoit Mandelbrot

This is about as tough a market to decipher as many investors have seen in years. Whenever I find myself at a loss for understanding Mr. Market’s signals during what could be an economic or policy phase-transition, I go back to the lessons I’ve learned from “The Brot” – many of which have informed my own Three C’s of Exposition

  1. Concise: the context easily conveyed to a time-strapped PM or analyst
  2. Coherent: it actually makes sense in the context of the underlying fundamental data
  3. Consistent: the view is the summary of a consistent and repeatable framework, rather than the sum of expert cherry-picking to fit a market narrative 

Setting aside our core investment themes, which are (duration in parentheses) … 

  1. #Quad4 domestically in 3Q19E (~2 months);
  2. A deeper-than-expected #EarningsRecession for US corporates during the two quarters ended 3Q19E (~4 months); and
  3. A pending inflection in global growth in 2H19E that contributes to a #PeakUSD and subsequent rollover in the global reserve currency that should perpetuate a relative recovery in EM assets (~9 months w/ considerable scope to continue from there

… let’s just review how we got here, sans baggage and sans confirmation bias. I think everyone reading this note will find a truly objective refresh of market dynamics more helpful than the alternative, insomuch that analyzing everything through the filter of our fundamental views does, in fact, lead to a few noteworthy discrepancies within the context of those Three C’s. 

How Did We Get Here? - z Crazy bull cartoon 08.19.2014

Back to the Global Macro Grind… 

Using US equities as a proxy for global risk appetite, investor sentiment bottomed on Bullard’s commentary on Monday, June 3rd, which confirmed the Fed was flirting with the idea of a late-cycle “insurance cut(s)”. Since then, that view has been reiterated almost daily under the guise of “acting necessary to sustain the expansion” – the favorite excuse of Fed Chair “PE Powell” – or to “boost inflation” – which has long been Chuck Evans’ obsession as the “Pit Boss” of the Chicago Fed. 

Since the close on Friday, May 31st

  1. Every benchmark US equity index is up with the NASDAQ (+10.3%) DOW (+10.2%) outpacing the S&P 500’s +9.2% return
  2. The Russell 2000 continues to have FOMO, considerably lagging at up +6.6%
  3. The relative performance of the MSCI Emerging Markets Index is confirming of a chase for large-cap liquidity at the index level, underperforming each of the aforementioned indices at up +6.3%
  4. Isolating large-cap US equities, it’s worth noting that every single S&P 500 sector and core style factor has a positive absolute return
  5. Tech (XLK), Consumer Discretionary (XLY), and Materials (XLB) have led the US equity market higher at +12.2%, +12.1%, and +11.0%, respectively
  6. REITS (VNQ), Utilities (XLU), and Health Care (XLV) are the three worst performing sectors at +2.6%, +3.9%, and +5.6%, respectively
  7. Value (IUSV) has outperformed Growth (IUSG) at +9.4% versus +8.2%
  8. High Beta (SPHB) has outperformed Low Beta (SPLV) at +11.3% versus +5.6%
  9. The dynamic of investors crowding into large-cap liquidity has not extended to the fixed income markets, with 25+ Year US Treasury Bonds (-0.6%) underperforming US High Yield Corporate Bonds (+2.6%) on a total return basis 
  10. Even more interesting to note is the relative outperformance of EM Hard Currency Debt (+3.0%) versus its US counterparts across the credit spectrum, which itself its being outpaced by EM Local Currency Debt at up +4.9%
  11. Looking to the global currency market, the US Dollar Index is down slightly at -0.4%
  12. Within the majors, the USD is down most versus the AUD, CHF, and CAD at -0.9%, -1.0%, and -3.4%, respectively
  13. More speculative markets like the JPM Emerging Market Currency Index and Bitcoin are up +2.2% and +10.0%, respectively
  14. WTI Crude Oil, Gold, and Copper are all up too at +8.3%, +7.3%, and +1.8%, respectively
  15. Pro-reflation markets like Brazil (EWZ) and Russia (RSX) are both up +9.8% and are outperforming something like India (INDA) – which is down -2.6% – whose net energy importing economy is negatively impacted by sharp rallies in the price of crude oil 

Using the June 28th double-bottom in the Citigroup US Economic Surprise Index as the starting point for the recent spate of better-than-expected growth and inflation data domestically – which included the JUN Jobs Report (NFP +224k MoM), the JUN CPI release (Core CPI +10bps to 2.1% YoY), and yesterday’s JUN Retail Sales data (Control Group +130bps to 4.6% YoY; best since AUG ’18) – we see that: 

  1. The S&P 500 is up +2.1% while the Russell 2000 is down -0.3%; Energy (XLE) and Health Care (XLV) are the only two sectors with negative absolute performance at -0.8% and -0.5%, respectively
  2. Rates and spreads have backed up across the curve with the 2yr Treasury Note Yield, 10yr Treasury Note Yield, and 10yr3yr Treasury Yield Spread having backed up +9, +9, and +4bps, respectively
  3. The rise in interest rates contributed to a down -1.8% total return for 25+ Year US Treasury Bonds
  4. Despite the bond selloff, bond proxies continued to perform well in absolute terms with REITS (VNQ) and Utilities (XLU) up +2.0% and +1.5%, respectively
  5. Using Homebuilders (ITB), Gold Miners (GDX), Semiconductors (SMH), and Transports (IYT) as proxies, interest rate sensitive US equities have lagged industries that are more sensitive to a recovery in underlying economic activity: ITB +2.7% and GDX +1.9% versus SMH +3.4% and IYT +3.2% 

Lastly, I think it’s important to partially abandon our drive to remain completely objective in this market review to appropriately score how US equities are responding to poor earnings: 

  1. As of yesterday’s close, 33 of 497 S&P 500 constituents reported Q2 results with Revenue and EPS growth tracking at +2.1% YoY and -0.8% YoY, respectively, on an aggregated basis
  2. Only 10 of those 33 companies have either preannounced or reported DOWN YoY earnings: GS, JBHT, PEP, CAG, NKE, WBA, FDX, LEN, MU, and CCL
  3. The mean return of those 10 stocks since just prior to their respective announcements is +4.0% with a percent positive ratio of 70%
  4. CAG, LEN, and CCL are the only three stocks that are down since then at -2.7%, -7.1%, and -12.1%, respectively
  5. The +8.9% return of FDX and the +31.8% return of MU since their results were announced after the close on 6/25 is suggestive of Mr. Market starting to price in a Q4/1H20 recovery in either the US economy or the global economy (or both) 

This begs the question, if earnings aren’t the catalyst for a summertime swoon, what is? 

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.96-2.18% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8023-8285 (bullish)
Utilities (XLU) 59.93-61.19 (bullish)
REITS (VNQ) 87.64-91.00 (bullish)
Financials (XLF) 27.32-28.31 (neutral)
Shanghai Comp 2 (bearish)
VIX 12.00-16.18 (neutral)
USD 95.85-97.36 (neutral)
Oil (WTI) 55.15-61.24 (bearish)
Gold 1 (bullish)
Copper 2.63-2.74 (bearish) 

Keep your head on a swivel,


Darius Dale
Managing Director

How Did We Get Here? - Chart of the Day