The current slow-growth economic climate suggests that defensive sectors like gold, utilities, REITs and Treasuries will offer the best returns, notes Landon Whaley.
We initiated the U.S. Shift Work theme in April 2018, and it got us paid (with favorable risk metrics) on the long and short side of U.S. markets for the balance of that year. In 2019, our bullish calls generated healthy double-digit returns, and with better risk characteristics than any other U.S. based markets. Our short calls had their moments in the sun but overall didn’t add much alpha from an asset allocation perspective. As we traverse Q1 2020, the U.S. economy is experiencing a Fall Fundamental Gravity, and U.S. Shift Work is back to ringing the register on both sides of the market!
The Data
Of all the U.S. data released each month, there are only about 30 data sets that really move the meter. Since October 2018, most those critical data sets have been slowing, month in and month out, and the bear market in economic growth continued right through year-end. Based on December’s data for 16 of those data sets, 14 slowed at an accelerating pace, while only retail sales growth and the retail sales control group improved from November’s reading.
Beyond a sea of slowing economic data, there is a ton of data hitting levels not seen in the last five years, and in some instances, levels not seen since the 2008 financial crisis.
The danger for investors now is two-fold. First, believing that U.S. economic growth is close to a bottom and nearing an inflection point, which will lead to a growth accelerating regime. Second, compounding this “we’re near a bottom” mentality by not being properly positioned for the Winter Fundamental Gravity that is coming our way.
That bottom line based on data is that U.S. growth will slow for at least the next five months, and we will experience a Winter FG during the first half of 2020.
Focus Markets Say What?
We ended January’s macro theme update by saying: “Utilities, gold and REITs held their own in December, but long-dated Treasuries left a lot to be desired. That said, all four market sectors will continue to do the heavy lifting for us in Q1 2020.” Well, consider me Miss Cleo because utilities (+6.3%) are the number one performing equity sector year-to-date, and REITs are third (+1.1%). Treasuries have come back to life and have already gained 7.4% and are even outscoring everyone’s favorite equity sector, tech (+4.3%). And finally, gold is out of the 2020 gates strong with a 4.5% gain and looks poised to move higher.
Not only are our bullish calls playing out nicely, but the short side of our U.S. Shift Work macro theme is back to making hay again. Basic material stocks are down 6.2% in the last month and, more importantly, are just entering hangover mode, which indicates further downside from here. Even our bearish call on U.S. small-cap value stocks is starting to turn in our favor with a year-to-date decline of 5.2%. As with basic material stocks, small caps are just starting to roll over from their recent highs, and the move to the downside looks ready to accelerate.
The Bottom Line
Our models have the U.S. economy in a Fall Fundamental Gravity, which will then slip back into a Winter FG sometime in the next five months. The Fall backdrop means we need to be stingy with our short book, picking our spots very carefully before we enter a target-rich Winter FG environment.
The Playbook for February is to maintain long exposure in gold, utilities, REITs, and long-dated Treasuries while opportunistically shorting basic material stocks and small caps.
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