"Summer Breeze" Macro Theme

We initiated the “Summer Breeze” macro theme on December 7, 2020, to serve as the guiding force for our investment decisions in both US and international assets over the final month of 2020 and the first half of 2021, says Landon Whaley of Whaley Global Research.

The Data and Nothing but the Data

An overwhelming number of critical US economic data sets ended the year confirming the U.S. trajectory towards a Summer Fundamental Gravity here in H1 2021.

The ISM Manufacturing PMI reading for December accelerated for the sixth time in the last eight months and hit the highest level since 2014. More impressive than the headline reading of 60.7, all but two sub-indices grew at an accelerating pace. The ISM is not the only data set showing that a US recovery is underway. Both US industrial production and factory orders accelerated for the seventh consecutive month to end 2020. The bottom line is the manufacturing sector is on the mend.

On the US economy's service side, the IHS Markit US Services PMI re-accelerated during January 2021, after a slight dip in December. January’s reading was the seventh improvement since this data series bottomed last April.

As for the Fundamental Gravity equation's inflation side, we have once again accurately called the pivot to a regime of higher inflation. We are now six-for-six nailing the intermediate-term direction of inflation, going back to 2018. While core inflation is still treading water at a +1.6% annual pace, both CPI and producer prices continue to heat up, month after month. If you’re unsure where inflation is likely to go from here, look no further than the US commodity market. All but four of the markets we track are trading higher today than when they rang in the new year.

There is not one data set in the last three months indicating anything other than a Summer Fundamental Gravity. As significantly, not one development has lowered my expectation this Summer FG environment will continue through at least June. My confidence in our “Summer Breeze” macro theme is further bolstered by what US-based assets tell us in real time.

US-Based Markets Say What?

From an equity perspective, the year-to-date ranked performance of US sectors tells the entire story. While the S&P 500 (SPX) is down (-0.29%) slightly this year, most of the sectors we expect to outperform in a Summer FG have done so handily: energy (+4.5%), consumer discretionary (+1.5%), small caps (+5.6%), and tech (+1.1%). We are also receiving real-time confirmation from the areas of the equity market we expect to underperform in the Summer FG as they lead the market lower: consumer staples (-4.4%), gold miners (-4.3%), and utilities (-0.51%).

Beyond the world of stocks, commodities (+3.4%) confirm our Summer Breeze macro theme as 80% of the commodity markets, we track have posted gains this year. On the bearish side, gold (-2.9%) and long-dated US Treasuries (-4.0%) are also delivering their typical summer-esque performance.

US markets have been humming the same tune for two straight months, “Summer breeze makes me feel fine.…”

International Econ and Market Data Say What?

Our “Summer Breeze” macro theme is not just paying dividends (no pun intended) inside the US but outside as well. We are seeing economic growth accelerating across the vast majority of economies, both developed and emerging. Within this list of economies transitioning into a Summer Fundamental Gravity are our favorites: South Korea, Taiwan, Australia, Russia, Japan, and South Africa. Not only did the Q4 2020 economic data (and the January 2021 flash data, where available) confirming this new FG reality, but several equity markets are signaling summer in real time.

US equities are down -0.29%, and only six global equity markets are in the black after the first month of trading. However, three of our international focus markets are in that top six: South Korea (+2.7%), Taiwan (+4.5%), and South Africa (+0.33%).

In fact, South Korea and Taiwan are the number two and three top-performing equity markets globally, behind only China (+6.5%). “…Sweet days of summer, the jasmine’s in bloom…”

Keep in mind; this outperformance occurred despite a moderately strong US dollar, which has managed to bounce +0.61% in the last month. Just imagine the outperformance of our international focus markets once the greenback heads south again, which is not a matter of “if,” but rather “when.”

The Bottom Line

For the first time in two years, every meaningful economy we track will be in a Summer FG environment at the same time. Historically, this confluence is a rare event. More importantly, this economic backdrop is as bullish as it gets for equity markets and risk assets.

We are uber-bullish on US commodities, energy stocks, metals & mining, and to a slightly lesser extent, tech. We also have a carefully curated list of individual stocks that align with our “2020’s Trash is 2021’s Treasure” sub-theme. Outside the US, we are bull-ed up for most of Asia, Australia, South Africa, and Russia. For the time being, we are going to hold off on any bearish focus markets or short positions in the Gravitational Portfolio. However, once the mongoose gives us the all-clear, we will be opportunistically shorting long-dated US Treasuries. We are also monitoring gold and gold miners for possible inclusion as bearish focus markets.

To learn more about Landon Whaley, please visit WhaleyGlobalResearch.com.