So much in life has to do with timing. A minute here, a minute there can make all the difference, states Jay Pelosky of TPW Advisory.

In our investing practice, timing is often critical: too early and one may get frustrated and sell out just as what one foresaw actually starts to transpire. Jump in late and one may not get the upside but rather the pullback that causes a quick decision to sell rather than hold and ride the renewed wave higher. Personally, I am often early. How about you?

Today’s title comes from some recent observations across the global macro space both economic and market. Much has been made, for example, about how the Conference Board’s Leading Economic Indicators have been negative month after month after month while its own coincident indicator says things are fine. The Philly Fed’s state coincident indexes are also supportiveseeing an improvement in all 50 states over the past three months.

Recession, that favorite bear term, has yet to show. Goldman now sees a one-in-five chance of a US recession in the coming year, roughly the same as the one-in-six odds over the past century. One also notes the Citi Economic Surprise Index (ESI) just hit a two year high reflecting the bearish sentiment and the more constructiveone may even (nowadays) say bullish reality of BTE economic data.

This brings to mind one of the strangest and most significant differences of the current period, namely, the huge gap between hard (data) and soft (survey) results. Surveys have been consistently negative for quite some time relative to the more buoyant economic data. Speaking of surveys, Bloomberg consensus suggests the US economy will grind to a halt this quarteryes, right now, and contract in Q4. Seems highly unlikely especially since the positive CPI & PPI data last week eliminates the risk that the Fed will overtighten and crash the economy. Falling inflation also has a clear link to rising consumption as real incomes grow.

Thus, the titlethe positive risk asset returns YTD are coincident, not coincidental, with the BTE economic data. I even looked up the definitions to be sure I was using the words properly; coincident means “occurring together in space or time” while coincidental means “resulting from a coincidence, done or happening by chance”.

In other words, good data has supported rising risk asset pricesin Europe last year, in the US ytd, in Japan, Brazil and other EMs over the past few months and perhaps starting over the past few weeks in Commodities. We anticipate this relationship to continue through the 2H and 2024.

This is not coincidental, it’s not a matter of chance. Perhaps the coincident earnings season will seal the deal; while the overall results are expected to leave Q2 US EPS down roughly 8% Y/Y, the vast (80% is the number I have seen) number of the early reporting companies have reported BTE results. Now yes this may well reflect a long standing Wall St tradition of marking them down prerelease to make them up post but it also reflects that BTE data, especially the nominal growth driver we have often noted. We remain focused forward and look to company guidance for the 2H and early read into 2024 to tell the tale.

That nominal growth driver reflects two key points: one that inflation + real growth is running well above the 2010-2019 period by a factor of 4-6x over the past year plus and now roughly 2x with 4% inflation and roughly 2% real growth (Atlanta Fed Q2 GDP Nowcast at 2.4%) and two, that company sales and earnings are reported in nominal dollars. With Q2 growth running at roughly 6% nominal, down earnings take some work. Our earnings outlook incorporates the virtuous circle we are enjoying as PPI falls faster than infl > leading to higher marginsall this before AI really gets going. A weak USD should further support 2H US EPS acceleration.

We are moving forward into a new growth cycle which features some ahistorical drivers. We expect the Bidenomics/New Industrial Policy (together with its EU and Asian equivalents) will continue to generate significant private sector co-investment that will support the economy for years to come. 

We have been in print with our view that Climate is the world’s single biggest global macro theme of the 2020s given that all countries are spending money on it now and in the future. Given that we are setting global heat records every day this month it would seem like a good idea to continue to invest in a zero carbon footprint. Climate’s global nature means competition between Asia, Europe and the US is developing over the EV supply chain, semiconductors etc. Competition is a good thing.

Our TPW 20 thematic model portfolio puts us at the climate investing coalface, split as it is between Future tech and Climate with a dash of aging, infrastructure and a few others thrown in for good measure. The two biggies represent roughly 2/3s of the model; ytd, it has been a tale of two halves. We have written about our barbell approach across our two models (the other being our flagship Global Multi AssetGMA) and the TPW 20 barbell has seen one side rocket upthe future tech with its AI vibe (think ARKF, SKYY, SMH etc.) while the Climate side (think URNM, KRBN, ICLN etc.) struggles to put it nicely.

Both sides share the same beaten down aspect following the big 2021 run up and subsequent crash with many holdings on both sides being down 70-80% from their peaks. Now that they have traced out 12-18 month bases, we believe they are set up to move appreciably higher as the adoption rate for different climate mitigation strategies pick up. Future tech has ledperhaps it’s time for climate to step up.

We expect markets to sustain this rotation across the globe, across sectors and across assets. In the equity space, we highlighted our US Tech and Cyclical barbell with XHB and IYT moving in line with coincident economic data even as the soft data was far from supportive. Mr. Market helped get us involved and we remain so.

We have also seen the global nature of the equity rotation from Europe to the US, off to Japan and more recently to select EMs such as Mexico, our supply chain realignment poster market and Brazil. Brazil is the poster child for inflation being a DM rather than an EM affliction given its inflation rate is below Germanys. We expect Brazil to lead an EM rate cutting cycle beginning this quarter and are becoming open to the idea of a potential hard landing in DM inflation as EU inflation expectations plummet to levels last seen in 2016. JPM notes global June core CPI inflation posted a 0.24%m/m rise (ex. China), its lowest reading in nearly two years. 

Moving across assets, we have our FI barbell consisting of US HY and EM local currency debt, both of which we are happy to note are among the best performing FI ETFs ytd. Here again the data showed no sign of an impending default cycle while sentiment towards HY hads been abysmal with the HY issuance window shut for much of the year. 

While we remain deeply UW fixed income, our EM local currency debt position is among our bigger GMA positions. We like it given our view that supply chain realignment fosters regional integration in our Tri Polar World’s three main regions and thus helps EMs in Lat Am and Asia in particular. Combined with low EM inflation means that as the Fed goes on hold (25 or not next week, Fed is done) space opens up for EM Central Banks to start cutting rates to stimulate their economies.

We note EM CB’s led the rate tightening cycle and we expect they will lead the impending rate cutting cycle. JPM notes that currency appreciation alongside rising US yields and moderating recession risk has opened a door that EM CBs should feel comfortable walking through. 

Our mantra remains: Fed on hold = USD down = ROW Equity/Commodities Up. Within EM equity, StoneX reports that Chinese stocks have widened this year's underperformance versus EM peers to 16 percentage points, the widest margin since at least 1999. The yuan is trading at the lowest level in 16 years against a gauge of EM currencies.  

Real time rotation to Commodities seems to be underway, providing another no recession signal. Mr. Market tells us GSG is breaking out above its 200-day resistance level while WTI does the same, perhaps sniffing out the more aggressive China fiscal policy stimulus we expect to see post the upcoming Politburo meeting. What does the soft (survey) data tell us? BofA’s FMS says: Biggest Commodity UW since May 20 and largest three-month rotation away from commodities since May 13. Wow, biggest three-month move out of commodities in a decade. We’ll take the other side thank you very much.

Q2 GDP data in China was ok while repeated small bore policy support has not yet caught fire. We note that Trivium, the China policy experts, commented on recent Govt support of the private sector as being unprecedented in the decade plus that Pres. Xi has led the country. A sign of desperation perhaps, or of overcorrecting past mistakes (tech beat down of the past few years) but be that as it may a global economy that is picking up steam coupled with the aggressive destocking in both oil and copper, we have noted previously sets up commodities and EM debt & equity to be among the winners of the second H. Coincident not coincidental!

Learn more about Jay Pelosky here.