The U.S. economy is rapidly reopening from lockdowns, which is great news, especially since China and other Asian countries reopened a while ago. But, how much of this has already been discounted by the markets? THREAD/1
My sense is that we have reached "peak reopening" and that markets already have priced it in. As you see here, the Federal Reserve Bank of New York’s weekly economic index (WEI) is still rising, but at a slower rate. /2
As the previous chart shows, it was exactly a year ago that the rate of change in the WEI bottomed out. This was the very same week that the stock market bottomed out, too. It’s always about the rate of change. /3
All of this tells me that, while economic conditions will likely continue to improve, the rate of change may be less robust. For the market, this suggests that it’s time to consolidate the recent impressive gains. /END
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If the pace of improvement for the economy has topped out and further gains will come at a slower pace—if we have reached "peak reopening" in other words—how might the markets react? Let's break it down: THREAD/1
If the current cycle mirrors what happened in 2010 and 1943—and I see many similarities—I wouldn't be surprised by a 10-15% correction in the market, as well as a counter-rotation back into the big growers. /2
Look at the spread between the percentage of Russell 2000 stocks trading above their 50-day average vs. the same for the S&P 500. Something broke for small caps a few weeks ago, right when the Weekly Economic Index reached its peak rate of change. /3
Peak reopening? If the acceleration rate of the economy's reopening has peaked, it makes sense for the style rotation of stocks to take a rest, and for bonds to find a bid. Lately, 10-year Treasuries are down 18 basis points from their high of 1.75%. THREAD/1
With upward momentum for yields broken, German and Japanese investors may feel more comfortable nibbling at U.S. bonds and hedging them back into euros and yen. It’s a far cry from 2019 when these investors had to give up yield to buy treasuries on a hedged basis. /2
Will yields eventually resume their uptrend and head to 2% and beyond? It’s possible, especially if you expect that inflation will eventually be making a secular comeback. The chart below of the money supply certainly seems to suggest it. /3
With mega-cap stocks regaining leadership in recent weeks, the rotation into small caps and value appears to have been put on hold. Does that mean the grand reopening has been fully discounted? THREAD/1
As we consider the data, it’s worth remembering that getting the cycle right is not just about knowing what comes next. Equally important is knowing what’s reflected in the price. /2
This shows the year over year change in the style performance. The bottom panel shows the NY Fed’s weekly economic index, which has done a complete round trip from lockdown to reopen. The re-open trade a few months ago seems to have been perfectly discounted. /3
Where are we in the long wave of style rotation? Based on the secular bull market analog of 1949-68 and 1982-2000, I think we have reached the moment of “peak rate of change.” The market should continue to climb but at a diminishing rate of change. THREAD/1
This chart shows the secular bull market analog in the upper left corner, and the 10-year compounded annual growth rate in the bottom left. The upper right is the ratio of stocks vs commodities, and below that growth vs value. Below that, inflation. /2
In terms of style rotation, the current cycle may be more of a “rising tide lifts all boats” dynamic rather than the zero-sum days of the early 2000s. /3
Large-cap growth stocks took the lead in recent weeks, propelling the S&P 500 to new highs. So let’s take a look at the “nifty fifty” largest stocks. Here, the relative return of the 50 largest vs. the next 450 (monthly data) since 1962. (THREAD/1)
Over the very long term, mega caps tend to lag the market, presumably because they tend to be rather boring quality stocks with high P/Es and steady but unexciting earnings growth. But, interspersed along that declining trendline are a few notable eras of mega-cap leadership. /2
The mega-cap growth period since 2014 is the 3rd such regime in six decades, with the previous two consisting of the original Nifty Fifty era of the early 1970s & the boom/bubble in tech stocks during the late 1990s. /3
) one step further by bringing gold into the mix. (THREAD)
Let’s take the above models and convert them into projected market values. The gray line shows the market cap of above-ground gold. We only have data through 2020, but I took the liberty of extrapolating this series using two simple assumptions. /2
The first is that gold production continues at the same rate of 100 million oz, as it has done in recent years. The second is that the price of gold will advance by the same 8% CAGR that it has since it started to trade freely in the early 1970s. /3