We initiated the “Summer Breeze” macro theme on December 7, 2020, to serve as the guiding force for our 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.
Just the Data Ma’am
If economic data can be disrespected, then the manufacturing and service sector surveys conducted by Markit and the ISM are Rodney Dangerfield. These four monthly surveys are collectively referred to as the “soft” data, while data sets like industrial production are commonly labeled “hard” data and are held in higher esteem. There’s no telling where this Wall Street-contrived distinction began, but we will fade the popular opinion that “soft” data should be ignored and use it to help position us for what is likely to come.
There are few economic data sets better at forecasting US economic growth than the ISM Manufacturing PMI survey (top of page 7). After slipping in January, the February reading breached the 60-threshold, hitting 60.8, the highest reading since February 2018. Beneath the hood of that headline number, we saw a month-over-month acceleration in new orders (64.8), production (63.2), employment (54.4), and new export orders (57.2). This improvement in the manufacturing sector was confirmed by the latest reading from the Markit Manufacturing PMI, which accelerated to 59 in March and has improved in eleven of the previous twelve months.
On the service side of the economy, the surveys were a mixed bag. The Markit Services PMI saw a slight bump to 60 in March, while the ISM Non-Manufacturing PMI dropped to 55, the lowest reading since May 2020. Surveys can often diverge, even within a particular sector, but the overall trend for the US service sector remains up and to the right.
From an inflation perspective, things continue to heat up and confirm the Summer Fundamental Gravity. We saw big ramps in the pace of consumer price inflation (CPI) (bottom page 7) and producer prices. Over the last few months, the lone hold-out has been the rate of core inflation, which has now slowed three times during the previous six months.
Economic data confirms the US Summer Fundamental Gravity, but markets have not for the past month. This type of disconnect between price action and underlying fundamental gravity happens often but rarely lasts longer than six weeks. We will continue to wait and watch both incoming economic and financial market data to understand better where the risks and rewards are likely to manifest in the months ahead.
Because of the lack of clarity, we closed all three bullish US Focus Markets a couple of weeks ago, and they will remain on the bench until financial markets indicate the all-clear signal to re-activate them.
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: Taiwan, Australia, Russia, and South Africa.
Evaluating the latest Composite PMI readings for G20 economies to gauge economic growth, we see an acceleration in every country except South Africa. As a reminder, the Composite PMI is a combo platter of the manufacturing and service sector surveys for that specific country.
On the inflation side of the Fundamental Gravity equation, we see the same confirmation of a Summer FG as we see in the US. Looking at the February consumer inflation data from the G20 economies, all but four saw an acceleration from January’s pace.
Internationally, we see the same disconnect between what the economic data tell us about the prevailing Summer Fundamental Gravity environment and what equity markets are indicating in real-time. As such, we closed all five bullish international Focus Markets, and they will remain dormant until financial markets show us it’s time to revive them.
The Bottom Line
Over the next few months, economic data will be compared to the Depressionary data we saw from April to June 2020. This year-over-year comparison will pave the way for some historic-level growth rates across many economic data sets. While this should provide a bullish backdrop for equities and risk assets, we’ll remain in wait-and-see mode. There have been precisely zero bearish catalysts over the last month (outside of the strengthening US dollar), yet markets haven’t been able to gain any upside traction. While the US and global economies will remain in a Summer Fundamental Gravity throughout Q2 2021, this doesn’t guarantee markets will behave accordingly.
We remain bullish on US commodities, energy stocks, and metals & mining. We continue to like individual stocks that align with our “2020’s Trash is 2021’s Treasure” sub-theme, such as Spirit Airlines (SAVE), Dave & Buster’s (PLAY), and Six Flags (SIX). Outside the US, we are bullish on equities in Taiwan, Australia, South Africa, and Russia. All of that said, we will hold off risking capital until markets re-align with the underlying Summer FG environment (and the US dollar heads south again) or a new Fundamental Gravity makes itself known. Sometimes in markets, the best thing you can do with your hard-earned capital is nothing at all.
To learn more about Landon Whaley, please visit WhaleyGlobalResearch.com.
