Rotation Frustration Grips A Suddenly Terrified Market, As Mnuchin Says ‘Can’t Shut The Economy Again’

“We can’t shut down the economy again”, Steve Mnuchin told CNBC Thursday, as US equities careened lower, with traders blaming the apparent resurgence of COVID-19 in a handful of states.

“You create more damage, not just economic damage — medical problems that get put on hold”, Mnuchin went on to say.

He also suggested that the experience of the last three months proves the economy shouldn’t have been shuttered in the first place. “I think we’ve learned that if you shut down the economy, you’re going to create more damage”, he told the network. “I think it was very prudent what the president did, but I think we’ve learned a lot”.

He’s right. We have “learned a lot”. One of the things we’ve learned, for example, is that the US (and the world more generally) was not prepared for a pandemic and probably still isn’t.

Another thing we learned is that there is no near-term impediment whatsoever to conjuring money out of thin air to assist families and small businesses, something which laid bare the myriad falsehoods and misinformation surrounding debt and deficit dynamics.

Of course, the economy does have to restart. Goods and services must be produced and rendered. You cannot simply “simulate” incomes forever.

But that wasn’t Mnuchin’s point on Thursday. Rather, he was likely attempting to calm nervous markets. US equities erased losses for the year this week and the Nasdaq 100 hit fresh all-time highs, something Donald Trump was excited to boast about on Twitter. Nobody in the administration wants another selloff, especially after the president effectively declared the crisis over last week during a celebratory press conference in the Rose Garden following the May jobs report.

Readers have seen the chart for Texas hospitalizations (which has spooked market participants). Another data point that’s getting some attention is the surge in Florida, where more than 8,500 cases have been reported over the past seven days, the most for any seven-day stretch since the crisis began. Hospitalizations in California are the highest in a month.

And so, we find ourselves in familiar territory, with the market exhibiting signs of pivoting back towards secular growth and slow-flation plays alongside a renewed bid for bonds.

“Secular Growth Tech and Defensive/MinVol sectors have been the multi-day winners against this duration rally backdrop”, Nomura’s Charlie McElligott wrote Thursday.

“Conversely, the recent high-flyer ‘Value’ stuff which is largely the economically-sensitive Cyclical spaces has again taken a backseat and reversed a meaningful portion of the month’s prior dramatic rebalancing theme”, McElligott went on to say.

This is precisely the point I tried to drive home in “The Only Debate That Matters“. Recall the following introductory passages from that post:

It feels as though each time the market conversation turns to bear steepening in the curve and any attendant pro-cyclical rotation in equities, the adjective “nascent” is always present. “Burgeoning” is another word that often shows up in those same conversations.

There’s a reason for that. “Burgeoning” and “nascent” imply that any bear steepener and concurrent shift away from equities expressions tethered to the duration trade in rates, is in its infancy at best, and will likely prove fleeting.

We use “nascent” and “burgeoning” in this discussion because we realize that the chances of a durable selloff at the long-end of the curve and a pivot towards things like cyclicals, small-caps, value and high beta in equities (and therefore away from secular growth and bond proxies) likely won’t pan out.

In colloquial terms, it seems like something always intervenes to short-circuit these nascent regime shifts.

Now here we are again facing the same “rotation frustration”.

Consider that the Russell 2000 is poised to underperform the Nasdaq 100 by some 8% for the week. That marks a dramatic reversal of fortunes after a three-week stretch of outperformance.

“This is why I continue to use the term ‘rebalancing’ versus ‘rotation’ to describe the recent factor and thematic moves in US Equities”, McElligott said. “Not everything has to be a paradigm shift”.

Indeed. Remember, the market has been trading the “slow-flation” macro backdrop for the better part of a decade, and while it’s easy to get caught up in the reopening euphoria on the way to jumping aboard the cyclical value train, don’t forget that we’re still mired in a recession.

Not only that, but the names which are poised to outperform in a post-COVID reality where more economic and social activity takes place virtually, are the very same secular growth/duration plays that have led the market higher for years.

Charlie sums it up. “The majority of investors continue to remain extremely skeptical of any sort of long-term macro regime change”, he said Thursday. “Particularly the past month’s ‘implied’ view of a secular flip to a more reflationary world”.