For all the talk of an imminent boom in the US economy, a cursory glance under the proverbial hood of a US equity market perched at record highs shows something ostensibly odd.
Expressions associated with the economic renaissance narrative and grand reopening theme have underperformed. That, despite what feels like the inevitability of what I’ve called the “summer bonanza” thesis.
Just as I wrote these very lines, an all-caps Bloomberg headline read: ECONOMY ABOUT TO BLAST OFF. That was according to some strategist being interrogated on television by Jonathan Ferro and Lisa Abramowicz who, if you’re not familiar, is what you get when you tell the factory your Sara Eisen is defective and they send you an upgrade.
Anyway, the simplest of simple figures (below) tells the story. The Nasdaq 100 was last week’s best-performing major benchmark stateside.
There are myriad other ways to illustrate the point — that’s simply the layperson version. On Monday, Nomura’s Charlie McElligott observed the same counterintuitive dynamic.
“Under the hood and despite the realization of US economic growth- and inflation- data overshooting, the Equities thematic- and factor- behavior last week was quite counterintuitive, with ‘Secular Growth,’ ‘Crowding,’ ‘Size’ (large over small), ‘Quality’ and ‘Low Risk’ surprisingly outperforming the recent high beta leadership seen in ‘Leverage,’ ‘Short Interest’ and ‘Cyclical Value’,” he said, adding that “macro factor laggards are even more glaringly confounding, with ’10Y Yield Sensitive’ -1.6% MTD and ‘WTI-Crude Sensitive’ -2.5% MTD.”
What accounts for this? Do the factors know something we don’t about the data’s inability to meet lofty expectations going forward? It’s probably simpler than that. It could just be that, at least for now, the boom is priced in.
“[There’s] a real question as to ‘how much of the fiscal and reopening is already priced in?,‘” McElligott went on to remark, before flagging what he described as “a real, historical macro phenomenon at play.”
Specifically, he said that a Nomura framework suggests that “over the past month, we’ve cleanly transitioned from the ‘Recovery’ phase which favors econ- and inflation- sensitives [like] ‘Cyclical Value’ to… the ‘Expansion’ phase, which looks far more nuanced, as the ‘easy’ money has already been made.”
Amusingly, the forward return profile (shown on the right, above) appears to suggest that this dynamic could persist for at least a month, and perhaps longer. “The seemingly counterintuitive outperformance of many ‘bond sensitive’ factors [versus] economically-sensitives isn’t just expected, but can in fact continue.”
That sets up a somewhat bizarre scenario that could find assumed “boom beneficiaries” (if you will) actually underperforming into the summer bonanza.
Of course, that doesn’t mean pro-cyclical expressions won’t benefit at all. Indeed, the “blast off” crowd pretty clearly believes you’d have a hard time losing money in stocks even if you tried right now.
Maybe they’re right. Maybe not. But what good is a rising tide if it doesn’t lift all boats?
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