TPW Advisory Monthly: 2H Outlook – The Pause That Refreshes

SUMMARY:

Covid Speed’s breakneck pace has ebbed somewhat as markets tread water, reopenings proceed & vaccinations continue. I expect this to be the pause that refreshes, remain constructive on risk assets with no major asset allocation changes & think recent high beta/thematic price action is a “tell” that suggests the next move will be higher.

How the various Dueling Dualities resolve will help provide NT direction. We enter Summer with staggered global reopenings; we will exit the year in a synchronized global economic recovery.

CLIMATE:

With Covid no longer driving either economies or markets, I replace Health with Climate. If Covid was a one year event (for markets); Climate will be a decades long process – one investors need to understand and invest in.

As such its perhaps not a surprise that in our new 100% thematic global model portfolio – The TPW 20 – Climate is the single biggest thematic category.

Two takeaways: first, the acceleration of climate related action will continue as stakeholder concerns and ESG disclosures push the pace – see Exxon’s recent AGM. Second, ESG related financing caps & rising demand for clean energy related commodities will result in a S/D imbalance that only price can fix.

ECONOMICS:

The great inflation debate will not be answered in the next few months – “testing time” remains late Summer, early Fall with clean data & thin markets. I see embedded inflation risk as low given large labor pool, rising productivity, easing bottlenecks and peak US growth already upon us.

Net – net, expect a sustained and increasingly synchronized global recovery cycle that starts to look more normal as we exit 2021. Inflation fears may continue but much should be in the price given taper talk and positioning.

POLITICS:

Europe and Asia take the lead here as Boring Joe Biden just gets the job done. Expect further Biden Admin legislative gains in the months ahead. Watch German and Japanese leadership contests for key state direction. China’s CCP Centennial suggests stability there. Latin American politics remain depressing but it’s all in the price as FX stabilizes and equities bottom.

POLICY:

Notwithstanding all the ink spilled expect policy to be relatively over the summer. Fall picks up with the Fed’s Sept meeting, Europe’s Joint Recovery Fund (JRF) disbursements and November’s UN Climate Conf (COP 26).

Fed can be patient given that the bond market is not buying the embedded inflation story.

While early its perhaps worth starting to consider what follows the mother of all fiscal stimulus – perhaps the mother of all fiscal contractions?

MARKETS:

Staying invested & riding through the occasional “pothole” has been and remains the right investment approach. Public market bubble talk is misplaced. The cross asset pause that refreshes will likely lead to higher equity prices as the earnings supported, twin engine Growth and Value led markets move higher. ACWX has been in a 10% range since January, expect it to break higher led by beaten up thematic, European equity and EM laggards like Latin America.

Here’s a few stats from JPM to blow your mind: On a PE basis, US Growth has not been this cheap vs the SPY in 35 years while US Growth & Value have never been this highly correlated over the same 35 year time span. See Charts 4,5 in the Monthly.

With selling exhausted in the high beta and thematic names, inflation fears overdone as signaled by UST break evens & softening commodity prices continued strong EPS growth could lead to further equity appreciation as the path of least resistance and maximum pain as inflation bears throw in the towel. Could the end of the inflation debate be BULLISH?

Crypto Carnage likely to impede the institutional adoption of coins somewhat while perhaps  setting up the digital pick & shovel opportunity.

Synchronized global growth ensures Commodity price gains have only paused not reversed and same with the upward direction of DM Sov rates. Expect the UST 10 yr. to work towards 2% and the German BUND to reach zero by YE. The USD should continue to weaken, especially against select EMFX like China’s Yuan (3 yr. High vs USD) and Brazil’s Real.

I covered several of these topics with BTV’s Jon Ferro earlier this week – take a look. I come on at the top, minute 1:30.

Enjoy the long weekend – very well deserved indeed!