Thursday, February 22, 2024

Morning Note: While Some Key Conditions Improve, Leading Indicators Still Warn, And Healthcare Well-Positioned

The following from BCA's narrative around this week's US Leading Economic Indicators (LEI) release should sound very familiar to clients and regular readers:

"Indeed, the US economy has been robust and the data do not point to an imminent recession. Financial conditions have eased, home prices have risen and consumer sentiment has rebounded. All these factors are supporting economic activity.

However, our base case remains that a recession is likely in late 2024 or early 2025. Beneath the surface of the resilient labor market, some of the leading indicators are weakening. Similarly, default rates on credit cards and auto loans have risen and the tailwind from excess pandemic savings is fading.

Additionally, the year-on-year change in the US LEI is a reliable leading indicator of recessions and although this measure has improved, it is still contracting by 6.97% in January. Its recessionary signal is even more accurate when it coincides with episodes of restrictive monetary policy and inverted yield curve. While the 2-year/10-year yield curve has flattened in recent months, the 3-year/10-year remains deeply inverted."

Hence, healthcare is presently a top sector weightings in our core allocation... While it doesn't look as cheap to us as it does to them right here, BCA agrees with that as well:

"Multiple tailwinds boost the appeal of the Health Care sector over a cyclical investment horizon. On the macro front, our base case at BCA Research is that the US economy is likely to slow this year ahead of a recession in late-2024 or early-2025. Health Care is a defensive sector that is among the best performers during the economic slowdown stage of the business cycle. Moreover, the aging population is a structural tailwind as it raises demand for drugs. Meanwhile, BCA’s valuation and technical indicators suggest that the sector is cheap and oversold relative to the broad market. Ultimately, while the near-term outlook is uncertain, we believe Health Care stocks are well positioned to outperform over a 12-month horizon."

Stay tuned... 

Asian equities rallied overnight, with 13 of the 16 markets we track closing higher.

Europe's rallying as well so far this morning, with 14 of the 19 bourses we follow trading up as I type.

On the back of Nvidia's incredible earnings report, US equity averages are rallying to start the session: Dow by 354 points (0.93%), SP500 up 1.56%, SP500 Equal Weight up 0.76%, Nasdaq 100 up 2.16%, Nasdaq Comp up 2.28%, Russell 2000 up 0.62%.

This morning the VIX sits at 14.38.

Oil futures are up 0.17%, nat gas futures are down 3.05%, gold's down 0.05%, silver's down 0.05, copper futures are up 0.46% and the ag complex (DBA) is down 0.56%.

The 10-year treasury is up (yield down) and the dollar is up 0.02%.

Among our 36 core positions (excluding options hedges, cash and money market funds), 21 -- led by Dutch Bros, XLK (tech stocks), FEZ (Eurozone equities), VPL (Asia-Pac equities) and DEM (emerging mkt equities) -- are in the green so far this morning... The losers are being led lower by Range Resources, AT&T, GDX (gold miners), XLP (consumer staples stocks) and DBA (ag futures).

"In the complex world, the notion of “cause” itself is suspect; it is either nearly impossible to detect or not really defined—another reason to ignore newspapers, with their constant supply of causes for things."

--Taleb, Nassim Nicholas. Antifragile: Things That Gain from Disorder

Have a great day!

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