In this week’s Macro Theme update, we review “U.S. Shift Work.” We don’t see a ton of Q4 data yet, but the data we have seen, coupled with what markets are telling us in real-time, are confirming that the U.S. is definitely in an FG4 environment, says Landon Whaley.

This changes the playbook for profitable trading here in the U.S. for the first time in 27 months. One of the best performing sectors, on an absolute and relative basis, in this type of Fundamental Gravity. The environment over the next six months will be highly conducive to being long REITs, and its exchange traded fund proxy the Vanguard Real Estate Index ETF (VNQ).

Fundamental Gravity says what?

Two chief variables impact the risk and return of asset prices: economic conditions and how central banks respond to those conditions. Together, these variables drive what we call an economy’s Fundamental Gravity.

We’ve received only a few glimpses of Q4 data from October “flash” readings of various indicators. The first tranche of finalized October data begins rolling in later this week with labor market reports.

e’ll have a full overview of this data when we update this macro theme again at the end of November. Hard economic data isn’t the only way to evaluate an economy’s prevailing Fundamental Gravity.

A key aspect of markets that most investors aren’t aware of is that financial markets often front run changes in the fundamentals. Or as Paul Tudor Jones once said, “"I always believe that prices move first and fundamentals come second."

Markets are telling us in real time that the U.S. is in a Fundamental Gravity #4 environment, no question about it!

Typically, the best-performing equity sectors in an FG4 environment are utilities, consumer staples, REITs and health care stocks. In addition, it’s the ideal environment for the U.S. dollar and U.S. Treasuries. The worst-performing equity sectors in an environment characterized by both growth and inflation slowing are energy, technology, industrials and financials.

If you rank the performance of U.S. asset classes and equity sectors since Q4 began, you get a crystal-clear picture of an FG4 landscape.

The five best-performing asset classes and equity sectors have been: #1 utilities, #2 U.S. dollar, #3 10-year Treasuries, #4 consumer staples, #5 long-dated Treasuries. REITs were #6 and health care stocks were #7.

The five worst-performing equity sectors have been: #22 oil services companies, #21 oil and gas exploration companies, #20 semiconductors, #19 biotech, #18 industrials.

Don’t forget that just a month ago, utilities, staples and Treasuries were among the worst-performing U.S. based markets in 2018. On the flipside, oil & gas stocks, semis, biotech and industrial were the market darlings from a year-to-date perspective. Both the loved and unloved markets accurately reflected the Fundamental Gravity #2 environment the U.S. experienced for the first three quarters of the year.

Fundamentally, there hasn’t been much in the way of Q4 data yet, but that will change later this week. That said, markets often front run changes in the economic data, and they are currently sending a very clear message that the U.S. is in an FG4 environment, where REITs thrive. During this type of FG environment, VNQ typically averages a +1.7% quarterly return, with an average quarterly drawdown of -9.9%. In addition, it posts positive three-month returns 74% of the time.

U.S. Shift Work and Getting Long VNQ. Part 2

This Friday, November 2, we will release part 2 of this commentary, which is where we will dig in to the other two critical forces, or gravities, that are currently impacting the U.S. REITs: Quantitative and Behavioral. We will also provide a detailed game plan for trading VNQ.

If you can’t wait the 48 hours to get the complete picture for this macro theme and the accompanying trade details, please email us at ClientServices@WhaleyGlobalResearch.com with the subject line “U.S. Shift Work – Part 2.”

We will provide you with the complete macro theme breakdown as well as sign you up to participate in a four-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358, and The Weekender.

Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.

Watch Landon Whaley discuss When Markets Cycle  in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.

Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.

Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.

Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.