“If there was ever time for a tactical reversal of US Equities ‘Momentum’ factor and with it, [the] potential for a large ‘value over growth’/’cyclicals over defensives’ reversal impulse—it would likely be now”, Nomura’s Charlie McElligott wrote, in a Tuesday afternoon note.
Earlier in the session, Donald Trump took to Twitter to shout about the relative merits of making a $2 trillion infrastructure investment plan the cornerstone of the “phase four” coronavirus stimulus package which seems inevitable, even as Mitch McConnell and Lindsey Graham said they’d like to at least get “phase three” implemented before moving to consider what will amount to a “post-viral apocalypse” spending bill.
Trump’s tweet grabbed all manner of headlines. To be sure, Trump and Democrats have always been close to being on the same page when it comes to infrastructure (he is a real estate tycoon after all, although “tycoon” may be something of a misnomer depending on who you believe when it comes to his career exploits). The economic hit from the containment measures associated with the COVID-19 fight provides the perfect opportunity to get something crammed through, as it would be politically risky (not to mention extremely uncouth) for fiscal hawks to block a plan aimed at helping the country recover from a devastating epidemic.
The president cited low rates in his exhortations to more spending.
“With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill”, the president decalared. “It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4”.
Kevin Muir, formerly head of equity derivatives at RBC Dominion, took the opportunity to remind everyone that Trump may well be the “first MMT president”.
“This is fine, actually”, Stephanie Kelton said of Trump’s infrastructure tweet. “He is just saying that Congress can write a $2 trillion spending bill without offsets and the Fed will clear the payments the way it has always done. Matching the deficit spending with bond sales, while unnecessary, is how we do it now”.
In terms of a tactical trade in the equities space, Nomura’s McElligott reminds you that April is the worst month for the “1Y Price Momentum” factor dating-back to 1984.
The “1Y Price Momentum” has, of course, been long secular growth and defensives and short value, cyclicals and high beta. It’s basically just the ultimate expression of long the vaunted “duration infatuation” and short a pro-cyclical rotation (i.e., short anything that would benefit from robust growth outcomes, higher inflation and a bear-steepener).
Obviously, the pro-cyclical rotation many market participants came into the year betting on (or, at the least, hoping for) didn’t pan out. It’s worth noting that many trades tethered to that thesis were already underperforming prior to the pandemic. Here’s a kind of idiot-proof visualization:
It goes without saying that any bet on an April renaissance (or, if that’s too strong, just call it a bounce) for things like cyclicals, crude, small caps and high beta, faces a rather daunting headwind – namely, a highly contagious, deadly respiratory virus spreading almost unchecked in Manhattan.
If that somehow doesn’t frighten you away from cyclicals, we’re also witnessing the worst plunge in oil prices in recorded history.
“Now of course this is all coming into the expected ‘peak COVID’ shock, with horrific implications for the global economy”, he writes, but reminds you that “the market ‘gets’ this, and as we know, tends to ‘pull forward’ future outcomes”.
The bottom line is that if you can somehow look past the epidemic and the inevitable economic carnage it will leave in its wake (not to mention the tragic human suffering), it’s at least worth considering that Trump has, with one tweet, “green-lighted advocacy of a debt-binge financed ‘New Deal 2.0′”, as McElligott puts it.
This “New Deal 2.0’ from POTUS will carry significant Democratic support from across the aisle”, Charlie says, before noting that if the market ever does decide the tsunami of fiscal and monetary stimulus announced over the course of the pandemic is enough to postpone an actual (i.e., a literal) apocalypse, well then we’re going to be facing a powerful pro-cyclical impulse into a “no pro-cyclical positioning” situation.