I’m glad to be back! It has been a few weeks since we’ve chatted over our last cup of coffee. Admittedly, I have been bolted to the chair with the sole focus of staying abreast of the the ever-changing dynamics unfolding within our financial markets. Needless to say, there has a been a myriad of cataclysmic moments as COVID-19 stressed an already fragile late-stage economic cycle. Nonetheless, I am excited to share an important update with you… we’re officially changing our tune. While this is not meant to be a pontificated Song of the We[a]k, it is a radical new melody as we begin to transition into a new business cycle thus new investment themes.
As most of our readers know, we have been “bearish” on the economy for roughly the last 26 months as our assessment of leading economic indicators were set to decelerate based on our DCA PIIL Model (Police, Inflation, Interest Rates, and Liquidity). During this period of what we called “late-stage”, we maintained allocations towards safe haven/defensive investments with elevated cash. To contextualize this, the chart below shows the cumulative total return of defensive sectors compared to the S&P 500 while the ISM PMI (our leading economic indicator) was decelerating.
Now after 26 months, we have begun to see that the last two years of falling interest rates, low inflation, fed liquidity, and ample global central bank policy is at a point where it becomes stimulative for offensive/risk-on assets. While the stock market is trading in a range over the past month, we’ve begun to see strong re-accelerations in market internals, which supports the economic recovery we’ve seen in our leading economic indicators. The chart below shows the re-acceleration in regional PMIs as well as another chart of cyclical sectors (banks) and factors (pure value) beginning to outperform.
To be clear, we expect to see further volatility as the economy not only reopens, but investors still grapple with the economic blindspot created from COVID-19. These phase inflection/transitions are always met with volatility as investors tend to extrapolate lagging economic data such as unemployment and GDP. With the use of our DCA PIIL model, we see ample signs of an economic re-acceleration in leading economic indicators which should pave the way for risk-on performance.
We will be hosting a webinar discussing our Re-acceleration theme in detail on June 10th which I hope you can attend. I will also be sharing much more insight on our new investment outlook within the coming weeks.