As economic growth continues to slow, Landon Whaley recommends traders invest in the utilities sector and short small caps.

We initially rolled out the U.S. Shift Work theme in April 2018 as we began seeing evidence of the beginning of a shift from the second longest economic expansion in U.S. history into a growth-slowing regime. As is typically the case, it took a few more months for the new macro theme to take hold, which it did in Q4 2018. Despite the government dramatically understating inflation to pump up Q1 2019 GDP, the U.S. Shift Work macro theme will continue to get us paid on the long and short side of U.S.-based markets. 

The Data Says What?

We track a wide swath of U.S. economic data to monitor the economy from multiple angles and to provide a system of checks and balances for Fundamental Gravity developments. Despite what politicians would have you believe, U.S. growth is slowing, has been for eight months, and will continue to for several more quarters.

There are tens of thousands of data points released in the United States each year, but there are seven growth-related data sets that tell the entire picture:

  • U.S. industrial production slowed for the seventh consecutive month in April and is now sitting at the lowest level since December 2016.
  • Export growth slowed for the fifth month in the last six and is also sitting at the lowest level since December 2016.
  • Not only are we sending less stuff out of the country, but we aren’t bringing in as much either. Import growth has slowed in five of the last six months and has fallen off a cliff since peaking at +9.7% back in September. 
  • U.S. Durable Goods New Orders growth has been in a downtrend since peaking back in August and has now slowed in three consecutive months.
  • Capital Goods New Orders have crashed 75% since last July, declining in five of the previous nine months.
  • Personal Consumption Expenditures growth has slowed for five consecutive quarters and is now at the slowest pace since January 2010!

And last, but by no means least, one of the growth-forecasting indicators is the ISM Manufacturing PMI. This index peaked at 60.8 back in August, has slowed in five of the last eight months and is now resting at the lowest level since October 2016.

The Fundamental Gravity bottom line is growth is slowing, and with the possibility of softer inflation, you’ve got all the ingredients for Winter to hit the U.S. economy. While we don’t expect it to be as harsh as Q4 2018, it requires an entirely different trading approach than when we are experiencing Fall.

The Game Plan

On the long side, we’ll focus on utilities, as they are one of the best performing U.S. equity sectors in both Fall and Winter environments.

On the short side, we’ll press short exposure in the Russell 2000 Value ETF (IWN) because it's heavily weighted (26%) with financial exposure.

A shift from one Fundamental Gravity season to another can be tricky and is rarely a clean hand-off. We’ll continue to lean on the data to confirm when Winter is taking hold and the Mongoose to position us correctly during, and after, the transition.

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