Take Off, Eh

As readers of my blog over the years will know, I have primarily focussed on the U.S. market outlook for commentary. As the decelerating global economies have crimped interest in anything other than Nvidia, Microsoft, and Apple, being underweight global assets hasn't hurt over the past two years. China's property bust, persistent European dysfunction, and a commodity bear market made them the cleanest dirty shirt option for investors. The inverted yield curve hurt banks and small caps the most, generating the historic market concentration into the Mag 7. These factors have created the preconditions for an asset rotation of massive and extended proportions into emerging markets and commodities over the next decade.

When does this rotation begin, oh market sage? Some believe it may have already started. Various scenarios are circulating about a post-soft landing reacceleration of the global economy. If the Fed is satisfied that inflation has been tamed and the U.S. labour market continues to soften, a further 150 to 200 basis points of easing could be in the cards. That would cement the bottom and begin a reflation cycle at relatively high capacity utilization levels. Economic slack never got a chance to form this tightening cycle, and that isn't priced into the yield curve. Can you say PE contraction?

I'm not sure it is, but a pre-election hiring freeze combined with the East Coast port strike could further crimp Q4 growth expectations, spurring Chair Powell to cut further. That would cement the reflationary forces accelerating the rotation into cyclical globally exposed assets. Over the past two weeks, China has done its part by proposing a 'do whatever it takes' stimulus of the domestic economy. Eurozone policymakers, led by Mario Draghi, are now proposing reforms necessary to generate positive growth. And let's not forget the most populous country on earth with the 5th largest GDP, growing at 8%, whose stock market is up 50% in two years - India. It's not just the weather and food that's hot over there.

Over the past few months, I have argued for a market correction in vain. The seamless rotation from Mag 7 to left-for-dead small caps, financials, and utilities caught me napping this summer. The deceleration in the U.S. economy and labour markets has been modest. Financial conditions are as easy as they have been in years, and credit market stress is minimal. Sideline cash is ample, and AI-induced market sentiment has moderated somewhat. It's been tough to defend my call, which looks decidedly offside now.

But all is not lost, correction fans. This crowded U.S. market trade is now under threat. It started with a sharp reaction to the Japan carry-trade sell-off in August. Although that dip was bought, it did call into question the concept of U.S. exceptionalism for the first time in years. And if we get further easing, leading to a market melt-up, I believe the bond market becomes highly vulnerable at yields lower than 3%. It would reverse sharply due to a rebound in expected inflation next year. High-valuation markets like the S&P won't like that. In addition, there is growing concern about deficit spending proposals from the Democrats and Republicans. Treasury sell-off is the probable outcome at some point.

That U.S. shirt is starting to look a bit dirty now. Especially if the Mango Massiah gets in and makes good on his tariff tantrums. Economically speaking, KH is only slightly less harmful, with higher taxes and targeted but punitive tariffs.

A weaker U.S. dollar would only exacerbate this trend. This chart bears watching for confirmation of the rotation to non-U.S. assets over the next decade. Breaking the uptrend, as happened in the early 80s and 0ts, would be significant. Flows out of Treasuries and U.S. stocks would only reinforce the trend towards the under-owned and inexpensive segments of global capital markets.

US Dollar Index

Just look at the chart below and tell me you aren't intrigued. The red arrow coincided with the last global reflation and U.S. dollar bear market. Having gone nowhere for 15 years since the GFC, this chart is primed for takeoff just as it did in 2003.

iShares Emerging Market ETF - EEM

So it doesn't matter if you buy now or wait for the U.S. large-cap correction. Based on relative valuation, the upside over the next decade has miles to go before it sleeps. After a long slumber, the bear market in globally exposed cyclical assets is ready and waiting to move significantly higher.

Canada's stock market is no different either. It has underperformed for years but has caught up in profitability and growth potential. Canaccord strategist Martin Roberge leads this analysis, arguing that Canadian stocks have a 7 P.E. point valuation advantage despite similar profit margins. Growth at a reasonable price is plentiful in the TSX, he contends.

I give up predicting when the S&P will correct. But it doesn't matter. There are lots of things to buy elsewhere, and now that the Fed is cheerleading instead of booing, it's time to get cracking. And speaking of take-off, how's this chart for starters? Nice volume non-confirmation, cheap fuel, happy pilots, and packed planes make for a great entry point.

Take off, Eh?

Air Canada

Risk Model: 2/5 - Risk Off

The TSX remains overbought at RSI 67 and 10% above the 200 DMA. It's best to wait out the October nervous period and hold fire for now. Buy any weakness.

The Vix is elevated from election hedging demand for protection. The AAII sentiment guage is bouncing back and forth as the narrative shifts from soft landing to hard landing and back. But most important is the positive inflection in Copper/Gold. It confirms my narrative of a global economic bottom that supports the rotation out of U.S. assets.

COPPER:GOLD