Equities Defy the Global Fundamental Gravity Picture

05/10/2019 1:20 pm EST

Focus: MARKETS

Landon Whaley

Editor, Gravitational Edge

Equities are blissfully ignorant and trading like its 2007, says Landon Whaley.

From a Fundamental Gravity perspective, not much has changed between Q4 2018 and the first few months of 2019. Of the 44 economies we track globally, 30 (68%) were experiencing growth slowing regimes during Q4 2018, and 25 of those growth slowing economies were mired in the dreaded Fundamental Gravity #4 environment, including the big boys: China, Eurozone, and the United States.

Fast forward to Q1 2019; the global Fundamental Gravity picture became slightly worse. Of the 44 economies in our purview, 31 (70%) experienced growth slowing, and 26 of those economies were in bearish Fundamental Gravity #4 environments including China, Japan and South Korea.

However, despite very little change in the global FG picture, there is a marked difference in how global markets traded in Q4 versus their price action this year.

Every single one of the 21 global equity markets we track is in positive territory for the year. Canada is in the pole position with an 18.9% gain, and South Korea is bringing up the rear having churned out a 4.3% year to date gain. These gains have come despite 14 of these 21 economies being body bagged by equity bearish Fundamental Gravity #4 environments.

Fixed income markets have also seen a bullish impulse, catalyzed by those bearish Fundamental Gravities pushing global yields lower. Here again, each of the 17 broad-based bond markets we monitor has posted gains so far this year, led by U.S. convertible bonds and their equity-esque 11.3% gain.

On the currency front, the U.S. dollar has gained 1.6% and yet eight of the 16 global currencies we track have managed to post gains. The Russian ruble has come out of the gates strong with a 7.9% gain while the Korean won is mirroring its underlying Fundamental Gravity #4 environment with a -4.4% year to date loss.

The currency and bond markets are considered to be the “smart” markets in terms of accurately reflecting the FG realities of their underlying economies most of the time. On the other hand, equities aren’t the sharpest tool in the shed when it comes to sniffing out economic truths, and they are also prone to FG divergences driven by sentiment shifts.

These classifications sum up the first four months of the year pretty well. For the most part, bond markets and currencies are aligned with their respective FGs and trading as we would expect, while equities are blissfully ignorant and trading like its 2007.

In the weeks ahead, Q2 data will start to flow, and we anticipate the data will confirm that several economies hit rock bottom in Q1 and are likely to perk up as we traverse the final eight months of the year. That said, we’ll remain data-dependent, process driven and risk-conscious. We are happy to remain neutral on most markets until the data further clarifies where opportunities are percolating and more importantly, where the risks are lurking.

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