Still Waiting
Last week I cautioned those who still care about the more economically sensitive areas of the market to wait for more evidence before committing fully to the Value over Growth trade.
You know that trade, the one we have been waiting for since Donald Trump was just a schlocky New York real estate tycoon with a failing reality TV show.
Judging by the market action last week, we are still waiting.
And we may never get there until this force-fed risk cycle comes to a shuddering halt or a whimpering fade-to-black from some as yet defined cause.
You see, the entirety of the current asset inflation experiment has been conducted by monetary authorities with blind faith. It has produced, at best, a mixed result.
Although unemployment has dropped to what were previously boom-time levels, income inequality has increased and productivity has lagged prior cycles. We can blame demographics, technology, or even political rigidities all we like, but this cycle has been mostly a story of valuation expansion. Bonds and bond-like assets (ones that expand valuations based on low discount rates) have benefitted disproportionately.
Blame the FED all you like, but they are just doing their job. Unfortunately priming the asset pump is not always enough to solve the structural problems confronting the global economy. As I have said before, the FED has an increasingly archaic mandate (U.S. unemployment & inflation) given the increasingly interconnected global economy.
See the demise of the Phillips curve as exhibit 1 for that premise.
Macro fiscal policies, including regulation, trade and investment are poorly aligned in many jurisdictions. Political polarization has frustrated attempts in many jurisdictions to produce growth-friendly policy frameworks. Impasse and partisan wrangling is rampant.
At least China can produce coordinated monetary and fiscal policies, as they have recently done. And signs that the Chinese economy have begun to reaccelerate have begun to show in the data, notably last week's report on first quarter GDP.
Quickly, however, the local analysts cautioned investors to curb their enthusiasm as the best news on monetary stimulation may be behind us.
Dutifully, the Shanghai market stalled out and copper with it.
As I said last week we need three things to corroborate the global reflation scenario:
1. Curve steepening
2. Copper breakout
3. Value outperforming Growth
We are not seeing any of these happen.
I will be patient for a few more weeks but as we get into May and we don't see signs of the above indicators turning, it might be prudent to sell and go away, especially in the cyclical asset sectors.
Or, given the massive underexposure to risk assets after the bond binge in Q1, we may get the stock version of a melt-up that Larry Fink spoke about recently. Pick your poison, the choice seems to be a coin toss.
I'm still waiting.
Risk Model: 4/5 - Risk On
The short term has all systems go for risk taking, judging from the stability of the indicators. Only a persistently overbought condition, evidenced by a 74 reading on the XIU RSI indicator is showing any caution.
The benign volatility environment is disconcerting for the bearishly inclined among us. I note the 3 month CBOE Volatility gauge has declined to levels last seen prior to last year's summer of complacency. We remember what followed from that pollyanna period.
I'm trading mostly from the long side but with tight stops and partial positions only.
CBOE 3 Month Volatility Index
