NEWDAY IMPACT WEEKLY RECAP COMMENTARY: JULY 19 2021
U.S. Markets: Growth Scare?
A “growth scare” and resurgent Covid infections are causing bond yields to fall, leading to volatility and sector/country rotation. But, stable consensus growth, inflation, and rates forecasts, together with a rising volatility skew and a declining term premium, suggest that investors are buying downside risk protection rather than downgrading the outlook.
We believe that the “scare” will soon be over, and the reflation trade will regain popularity. Uncertainty about timing, however, warrants a more cautious risk stance.
Picking stocks is not easy. Predicting the ebb and flow of the market and identifying which stocks are going to be rewarded by investors can take a lifetime to become proficient in. As such, it is not often that an easy or straightforward call on positioning comes along. Today is one of those times … and the call is to avoid junk! Junk only works early in a recovering market cycle and that time has passed.
U.S. Economy: Growth is Peaking
Source: Cornerstone Macro
Is growth peaking? Yes, that is obvious. There is no way growth can continue at a double-digit pace — there’s only so much pent-up demand, and the one-off unprecedented monetary/fiscal stimulus is clearly fading (M2 is slowing, and federal outlays are declining). And we need to look at house and autos sales … two, highly cyclical parts of the economy that are now beginning to weaken. Indeed, in large part because of weakening housing and auto sales, today we are seeing 2Q real GDP forecast analyst expectations being reduced from 14% quarter/quarter annual rate to 10%. 10% is still a huge number!
But the 2Q downward revision highlights that higher housing and auto prices have triggered demand destruction in both sectors. We think this will spread to other sectors that have also seen surging growth, and now too-high prices — from the used car craze to the furniture buying boom. Headline CPI has surged 5.4% year/year (y/y). That is at or near its peak, with high prices hurting demand, and ultimately, pricing power. That is already unfolding in used car prices, as Manheim reported for June (-1% month/month). At the same time, production is finally picking up, as the Empire & Philadelphia Fed Manufacturing surveys both showed, along with a planned surge in 3Q auto production – just as demand is starting to fade, supply is picking up. So, although we see a decline in 2Q real GDP forecast, we see 4Q increasing from 4% to 6%, as a potentially enormous inventory rebuilding cycle unfolds. Net, net, these new forecasts only lower slightly our Newday 4Q, 2021 real GDP forecast from 9.0% y/y to 8.5%. We are also reviewing our 2022 real GDP forecast, which we are comfortable forecasting at 3.8%. At the same time, the job market is gaining momentum, pushing up wage growth. However, strong productivity growth, which is becoming consensus, we anticipate core inflation to remain low. Bonds appear to have figured this out.