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.
US Economy and Market Data Say What?
An overwhelming number of critical US economic data sets have begun the year confirming the current US summer fundamental gravity; singing “Summer breeze makes me feel fine…” for all to hear.
The Markit US Manufacturing PMI hit a record high in January 2021. That’s not a typo, folks, a record high. One of our favorite economic data sets to watch, the ISM Manufacturing PMI, actually slipped a bit but remained at a four-year high. Despite the divergence in these two data sets, the comments from the IHS Markit chief business economist says it all, “US manufacturing started 2021 on an encouragingly strong footing, with production and order books growing at the fastest rates for over six years (emphasis mine). Demand from both domestic and export customers picked up sharply in January, and consumer demand has improved while businesses are investing in more equipment and restocking warehouses, preparing for better times ahead.…”
Beyond the survey data, US industrial production accelerated for the ninth consecutive month (January 2021) while factory orders accelerated for the eighth consecutive month (December 2020).
On the service side of the economy, both surveys confirmed the Summer FG in their January releases. The IHS Markit US Services PMI accelerated for the second consecutive month, and the ISM Services PMI accelerated for the third straight month.
No US economic update would be complete without mentioning the blistering retail sales report in January. After slowing for three consecutive months, sales growth hit +7.4%, the highest annual pace since September 2011! The consumer is alive, well, and thriving in these United States.
As for the inflation side of the economic equation, both CPI and producer prices continue to heat up, while core inflation smolders. If you doubt the most likely inflation trajectory from here, look no further than US commodities. Every single market we monitor is trading at a higher price, on a year-to-date basis, except for orange juice.
There is not one economic data set in the last four 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.
The price action in financial markets further bolsters my confidence in our “Summer Breeze” macro theme. US equities, bonds, and commodities are all confirming this macro theme and singing at the top of their collective lungs, “…a little light-a-shinin' through the window; lets me know everything's all right….”
International Econ and Market Data Say What?
Outside the US, we see economic growth and inflation accelerating across the vast majority of economies, both developed and emerging. Within this list of economies boasting a summer fundamental gravity are our favorites: South Korea, Taiwan, Australia, Russia, and South Africa. Not only did the Q4 2020 economic data confirm this new FG reality, but the data reported in January and February also indicated ”The jasmine's in bloom.…”
From a financial market perspective, we see the same summer breeze confirmation as we see in US markets. All but three global equity markets (Brazil, Indonesia, and Mexico) are in the black on a year-to-date basis. As we’ve discussed, everything goes higher in a summer FG environment, so it’s critical to focus on relative outperformance. On that front, we’ve crushed it. Our international focus markets have handily outperformed: Taiwan (+9.5%), South Africa (+5.5%), Australia (+3.2%), South Korea (+1.8%), and Russia (+1.6%). In fact, Taiwan and South Africa are the first- and third-ranked equity markets in the world. Boom!
As a reminder, this EM outperformance occurred despite a moderately strong US dollar, which has managed to bounce +0.76% this year. 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.”
“…Summer breeze makes me feel fine, Blowin' through the jasmine in my mind.…”
The Bottom Line
For the first time in four years, every meaningful economy we track is 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.
To learn more about Landon Whaley, please visit WhaleyGlobalResearch.com.