2 key tradeoffs between now and year-end: first, the best global synchronized economic recovery in decades vs. the onset of Quantitative Tightening (QT) and second, the US specific Fed balance sheet reduction process vs. the Trump tax plan.
Global growth is accelerating and so can’t think of a better time to begin withdrawal of CB support.
A US tax cut in next 6 months would give late cycle US economy a booster shot that could stimulate a cap ex cycle and provide a meaningful earnings boost to US companies and hence the stock market.
Global financial markets have been climbing the fabled Wall of Worry all year; 60/40 balanced portfolio up 10% ytd and 3% in Q3.
1St H Low volatility begets 2H low volatility with September having the lowest volatility for the month in 70 years.
This low volatility has persisted through what is historically the worst period for the SPY suggesting a strong run into YE.
Investors may not be BULLISH enough.
One underappreciated RISK: BIG TECH in the crosshairs of Govts around the globe: US with Russia etc., Europe with privacy concerns & China with Govt “encouraging” investments in SOEs.
In my Global Risk Nexus (GRN) scoring system, this falls under regulatory policy risk. TECH has been the equity leadership sector and represents 27% of EM equity (big #), 23% of SPY but only 13% of Japan and 8% of EU equity.
Tech risk is another reason to look to non US DM equity mkts, a long standing view of mine.
Sell Big Tech (XLK); buy Industrials (XLI) as play on late cycle cap ex boom.
Buy Commodities (DBC) – V out of favor, oil stabilizing, China stabilizing, inflation hedge.
Sell US big caps (SPY); buy small caps (IWM) as play on tax cuts.
Buy Hedged Japan equity (DXJ) – play on Fed policy vs. BOJ stand pat… strong EPS growth (+ 30% y/y) and foreign investors V underexposed.
BIG TECH is at regulatory risk; BANKS are regulatory winners. European banks have been big winners ytd, up nearly 30% vs 18% for US banks.
In the US, the easing of Dodd Frank and ability to return capital (banks are printing money) are big pluses, not to mention being a beneficiary of higher rates (XLF).
In Europe, the renewed focus on cleaning up NPLs and potential for consolidation (Commerzbank rumors) are real pluses together with ability to hedge against rate rises and the possibility that NIRP could disappear in 2018 (EUFN).
In China banks are benefitting from reserve requirements cuts and could also be big winners from possible regularly changes regarding financial market opening post the Party Congress (MCHI).
Europe is the RESURGENT region in my Tri Polar World (TPW) construct with political risk giving way to economic recovery.
Potential for a Franco – German leadership push for deeper European integration across financial and digital spaces among others provides a second leg for EU story.
A slow moving ECB, lots of economic slack, stable FX are all supportive as is attractive equity market valuation and earnings growth.
While Spain is a bit worrisome and German coalition building may take time, corporate integration is well underway with steel (ThyssenKrupp- Tata) and rails (Siemens – Alstom) leading the way.
In an America First world, the US has been the weak performer ytd with All Country World X US up 23% vs. SPY up 15%. The only bad investment decision this year has been to not be invested. It’s too early to sell – buy any dips.