2H Outlook – More of the Same Please – synchronized, moderate, global econ recovery (ALL OECD Cts growing – V, V rare, 07, 84) w low infl leads to low rates, slow moving CBs and good env for fin risk assets, esp. stocks buoyed by rising E. Rising Ind Metals confirms this. Dr. Copper +36% last 1Y, +11% Q3 td.
Central Banks shift from tailwind to moderate headwind. Expect Fed to go slow in policy normalization – Fed now has optionality meaning it can cut, as well as raise, rates. This is good news and better than any time in prior several years. Demand for safe haven, long duration assets means Fed cant raise short end too quickly or it risks inverting yield curve…2/10 spread only 80bps.
Peering Thru the Mist Outlook piece last week – DC a mess, WH turmoil, Charlottesville fallout, hard to imagine worse week or month for T Presidency…
GRN score for politics & policy a 1 w 5 the best. Reflected in August mkt perf: GLd +4%, TLT +3%, SPY +.2% ( XLK +3%,XLF -1.6%, XLI +.2%)
Given 18 month rally with V few pullbacks, PMs need to stay invested yet need some protection (UST, GLD.SLV), stks not overbought, SPY up only 1.6% past 3 months., sentiment muted, cash levels reasonably high, big outflows from HYG. Barbell: stks + GLD/SLV.
V busy Fall: debt ceiling, bdgt, tax reform, NAFTA, now add DACA, Harvey…. V little expected out of DC as indicated by weak USD and small caps which were big post elec winners… R need something to run on in 2018 midterms and think reasonable to expect modest tax reform by Q2 18 > potential invst opportunity. Apparent Trump debt ceiling deal may be first step.
FALL SURPRISE: DC gets a W > mkt winners = oversold USD & underowned small caps ( +4% ytd, -1.3% Aug – lookfor laggards)… $ bounce hurts large caps > $ into small caps (IWM).
CAP EX CYCLE: Like Industrials (XLI, stks like GE) recent Philly Fed survey suggests cap ex spending plans at 30+ year HIGH, Harvey only increases likelihood.
USD doesn’t want to go down: Trump troubles, Harvey, NK missiles, UST rally and $ flattish…any sign of DC policy success and $ will rally.
WALL OF WORRY: Stock mkt has proven real big boy ability to climb Wall of Worry… in addition to above, seasonality, NK concerns real… also sector leadership concerns with tech in cross hairs of Govts around globe…expect modest SPYupside thru YE with limited downsidebut see better Opps elsewhere.
V keen on Europe – cyclical econ recovery + lots of slack + 2nd leg driven by regional integration w M&M team (Merkel V supportive of Macron EU agenda – Fin Min, EMF etc.) suggests best region next 3-5 yrs.… Euro due for a breather as $ recovers a bit… EU stks mark time since May – EZU, EWP, EUFN… Euro means V slow ECB unwind = positive for stks.
Japan… A big laggard even though best & broadest econ recovery in yrs > E growth, play on global recovery…. Yen sentiment most bullish in yrs yet couldn’t break new levels even w NK missile flyover…like DXJ.
China – Fall PC Oct…. Fortune Global 500… 110 or so Chinese companies… V big future focus…EM equity tricky – had great run YTD + August (+2.3%) but if $ recovers that shld challenge EM…