In December of last year Goldman Sachs was predicting four rate hikes from the Fed in 2019. Goldman was not exactly an outlier either. Record low unemployment, rising wages and tax cuts percolating through the economy all suggested a tightening of policy. Then the Fed pivoted. Overseas slowdowns and the trade war deteriorating in to all areas of commerce, combined with the weakening early year soft US data fostered an ongoing belief that we were accelerating in to a recession with the Fed way behind the curve. Bond yields have been plummeting ever since and the stocks of dividend giants such as Nestle and Diageo (for that is the two stocks illustrated) have been in demand. In other words defensive names have prospered, secular growth names have prospered (see NASDAQ) while cyclicals have been shunned (see bank stocks).
Chart 3
The economic data coming out of the US and other areas of the World has been better. The question being asked is, has the second derivative turned in leading indicators of growth? Possibly, but the real kicker, as always, is positioning. Crowded trades beget more crowding. For example the mortgage players having to buy “more” treasuries and the income funds having to buy more defensive dividend giants as yields plummet.
September 9 may not be a one off. Big drawdown shocks in momentum stocks, the likes of which we saw on this now historic date, have a propensity to produce horrendous annual returns and the flip side is true for value. We may be entering such an era.
Source: Bloomberg Chart 4 Source: Bloomberg
However, as we can see to a certain extent (NASDAQ yet to break) from all these charts, the dynamic has started to unravel. Monday 9 September will go down as one of the biggest reversals in momentum and into value stocks in history. Why? The playbook changed. From complete breakdown, trade negotiations are back on track. Trump honoured China’s 70th anniversary of the People’s Republic by extending tariff implementation. Also, China’s Huawei have offered to sell their 5G technology to a foreign competitor.
As I write, and of course that is before you get to see this publication, we are a few days away from September expiry. Last weekend saw the attacks on Saudi oil fields. The recession perception flipped back, US treasuries are rallying again, and momentum is recovering. Indeed the market is a tad softer generally and post expiry we will lose two buyers from the market. We will lose the buyback bid as companies approach Q3 earnings and we will lose the gamma hedgers, the call sellers that had to buy as the market has ticked higher since the last week of August. That being said, I feel the Saudi’s will get their production back on target pretty quickly. Future strikes are not ruled out, but the swift action from the US in punishing Iran could make them less likely. The rotation trade will return after a sell- off in September.
WE APPROACH EXPIRY AT PIVOTAL POINTS FOR MANY ASSET CLASSES
RESISTANCE IN MAIN INDICES.
Can we put a macro slant on it? Yes, Trump is losing the trade war. He’s losing US farmers and we are not that far from the 2020 election and he knows it. What if we get a trade deal? The dynamic for these crowded trades will turn on its head. However, one has to remain sceptical and guarded. Trump is the human option, his defects of character are severe and his ego could override any pragmatic approach. Watch this space, for while markets look summer quiet and on the surface a little tedious, this is an example of the White Swan with black legs - or in other words, things going right meaning that this fierce rotation may continue in to the year end and keep investors up at night.
17 | ADMISI - The Ghost In The Machine | September/October 2019
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