Wednesday, September 1, 2021

This Week's Message: The Trade That Keeps On Ticking -- And -- Status Quo Bias

The trade that keeps on ticking is large cap U.S. growth (read big tech). And the latest data, frankly, couldn't offer more support.

You see, the tech sector does well when, well, the economy doesn't. When there's doubt about the pace of overall growth going forward; calling into question the prospects for the sort of human action that consumes energy, materials and so on. I.e., when folks are "idle" -- well, they're actually not -- not, that is, when we're talking the utilization of engaging technologies.

So, absolutely, bad economic news is good news for the tech space. It also quells the fears that the Fed is about to turn down the monetary spigot -- and, yes, low interest rates are especially good for tech stocks as well.

Here's Bespoke Investment Group this morning on the topic:

"As things currently stand, the headlines for Technology look great. Last week, Fed Chair Powell signaled that he is not in a super hurry to start tapering, and with recent economic headlines, it’s hard to imagine that position changing. During the month of August, all five of the regional Fed manufacturing indices decelerated versus July and generally came in weaker than expected. Not only that, but Tuesday’s Chicago PMI also reinforced this trend as well as the Consumer Confidence report which was much weaker than expected. Then, this morning the ADP Private Payrolls report missed expectations by over 250K for the second straight month. The ISM Manufacturing report did manage to top expectations, so that was a bright spot, but it didn't exactly blow away expectations.

The economy is still showing growth, but momentum has decelerated. It's hard for us to imagine Powell moving up the taper timeline just as we head into the fall as the Delta surge continues. An environment where growth is becoming more scarce and the Fed remains easy allows Tech to shine as it has for the last few months."

So, should we therefore just go ahead and back up the truck to the tech sector and load er up?

Well, sure, if, that is, we believe that Delta's here to stay and that, in the U.S.'s case, a typically-eager interventionist Federal government is going to sit back and let the economy slowly slide south for who knows how long. I.e., if that massive 3.5 trillion dollar spending package on top of a several hundred billion dollar infrastructure plan simply ain't happening. If, indeed, the sector that dominates the S&P 500 like no sector has since financials in 2007, and, by the way, itself in 1999, is a safe place to park the bulk of your portfolio. If, yada yada...

Well... let's not (not back up the truck, that is)...

I suppose I could say that folks who remain loaded up with tech are falling prey to status quo bias, but, you know, that's kind of what we're doing right here as well...

I mean, we're assuming the status quo when it comes to our expectations of ongoing fiscal stimulus, and the Fed's willingness to fund it. But, honestly, it's really more about us thinking probabilistically than it is simply sleeping with the status quo.

Here's from my latest entry to our internal thread titled "Near-Term events, probabilities, ramifications, etc…"

THE FED:


  1. Fed Tapering QE by the end of the year. -- Odds 70%

    1. Determining factors

      1. Improving Delta variant numbers makes for high odds, and vice versa

      2. Stubbornly high inflation reads are applying the primary pressure for action

      3. Conversely, a weakening of the data could stay their hand

        • Econ surprise indices show notably disappointing data of late
  2. Market Ramifications

    1. Powell’s signaling a coming taper at Jackson Hole actually rallied markets -- as he entirely dismissed structural inflation factors. I.e., he egregiously misguided/misrepresented conditions in terms of the extent (and broadness) of present inflation. Essentially, he convinced the market that even with a taper the Fed won’t allow for anything major to the downside.

    2. If the taper is met with relatively robust economic data and an improving covid backdrop I see heightened risk that tech stocks, in particular, will correct.

    3. If, on the other hand, taper occurs amid weak data and little headway on covid, I see exceptional risk of a notable equity market correction… Tech, however, would likely outperform in such a scenario.

    4. No year-end taper is simply bullish for equities across the board.

Stay tuned... And, yes, stay hedged 😎! 

Thanks for reading!
Marty

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