2020.10.05 – Broken Trends: How The World Has Changed

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EXECUTIVE SUMMARY

The world is changing, but it changed even before Trump’s COVID-19 news.

In the past few weeks, a few key macro trends have reversed themselves. The U.S. Dollar, which large speculators had accumulated a crowded short position, stopped falling and began to turn up. In addition, inflation expectations, as measured by the 5×5 year forward, stopped rising and pulled back.

We interpret these conditions as signs of caution. There are three major trade blocs in the world. U.S. growth is starting to stall as there are limits to what monetary policy can accomplish. The lack of further fiscal stimulus has the potential to snuff out a recovery. Across the Atlantic, the latest inflation figures came in below expectations. The ECB’s monetary policy response has not been as assertive as the Fed’s. In China, the recovery has been uneven and driven by the production and export sectors. The sustainability of China’s recovery is hampered by a lack of global demand. In addition, Chinese households have not participated in the recovery and their finances are strained, which is proving to be a drag on any consumer-driven growth.

As a consequence, our Asset Allocation Trend Model signal has been downgraded from neutral to bearish. For U.S. equity investors, this suggests that growth stocks will continue to dominate value stocks, at least until the growth and cyclical jitters are over. In a growth-starved world, investors tend to flock toward established growth names. Expect growth to dominate value, and large caps to dominate small caps in the current environment.

Investors should stay cautious, at least until the results of the election become clearer.

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