CwA: Table For One

It seems like only yesterday when I was all but laughed out of the room when I sounded the alarm on the business cycle entering its last stage. It was January 2018 when I began expressing my thesis for a seismic regime change in financial market leadership and mounting stress within the economic system. During that time, we had just experienced one of the best years in the stock market and everyone alike was inebriated with animal spirits as the economy hit its 31 month of economic acceleration. It was a painful lesson for some that did not heed the warnings from the business cycle. Now, after two and a half years of economic deceleration, bonds outperforming stocks, record volatility, and dire economic data, we’ve Changed our Tune as we believe economic growth is in the early innings of a reflationary period. And just like our call for economic deceleration, we again find ourselves sitting alone at the dinner table as many investors are hesitant to take a bite of this reflationary cuisine.

Needless to say, the economic damage from COVID-19 has been eye-opening to many investors and will take years to repair given the amount of jobs lost. But, financial markets, being a leading economic indicator, performs based on the rate of change in leading economic conditions. What this means is that economic data points such as GDP, unemployment rates, personal income are coincident and lagging economic data which is essentially yesterday’s news. To contextualize this, the stock market bottomed in March of 2009 which was 9 months before the peak in the unemployment rate.

With many of our market internals are showing signs of life for an economic recovery, we believe that we’re finally at a stage where the last two and half years of falling interest rates, low inflation, fed liquidity, and ample global central policy is at a point to where it becomes stimulative for financial markets. During this phase transitions from decelerating to accelerating economic growth, we see strong outperformance in cyclicality sectors and factors such as banks, industrials, materials, value, high-beta and quality. One of the real-time indicators we rely heavily on to determine if the financial markets are pricing an economic recovery is the S&P 500 Equal Weight Index. The equal weight index takes every stock and re-weights them equally compared to the most commonly viewed index which is weighted based on the size of the company. This equal weight index gives a better representation on how each company stock price performs rather than an index being driven by the top 5 largest companies like Amazon, Apple, Microsoft, Facebook, and Google. What we have seen is that the composition of all the companies equally weighted have begun to outperform the index weighted based on company size. This is normal occurrence when economic growth is accelerating.

As we enter this new period of economic growth, we expect to see volatility episodes as investors still grapple with the economic blind spot created from COVID-19. 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 Reacceleration 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.

Sincerely,

Andrew H. Smith
Chief Investment Strategist
andrew@delosca.com
asmith971@bloomberg.net

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