U.S. Equities – If You Can’t Beat ’em, Join ’em by Macro Ops
The markets are rallying hard! In this Market Sitrep we explore what’s ahead for U.S. equities in the near term. We examine the 3 main drivers of the rally, and then dive into why this breakout may actually have some legs. The episode finishes with a look at all the stocks we have bought or are interested in buying.
- U.S. Equity Market Breakout
- Stocks We Are Watching
Fuel Behind the Fire
- Typical Late Cycle Sentiment
- Equity Risk Premium
- China’s Massive QE
Late Cycle Sentiment
- Bears have been getting killed in U.S. equities
- Fund managers can’t stay in business staying short, they need to produce returns for clients to avoid redemptions
- Buying is the only way to make money right now so that is what they are forced to do
Equity Risk Premium
- ERP is the difference in the risk premium spread between assets, most notably 10yr treasuries and the equity markets
- Falling rates around the world continue to make equities the only game in town
- As the yield on long bonds continues to move lower, the risk premium on equities widens, making equities more attractive
- U.S. long bond yields continue to drive lower due to global relative value trade (U.S. is still the world’s cleanest dirty shirt)
China’s Massive QE
- China has been conducting a MASSIVE hidden QE over the last 6 months through their repo markets
- This is likely having a large impact on commodity demand and boosting some emerging markets
- The PBOC has injected over $1.6 trillion of cash into the Chinese markets this year through the repo market. This intervention (net of foreign reserve changes) is approximately $2.8 trillion annualized, or about 26% of its nominal GDP. This annualized net level of QE is beyond any other major central bank stimulus program today. It exceeds both that of the European Central Bank (ECB) and the Bank of Japan (BOJ). –CrescatCapital
More Gas In The Tank?
- Liquidity conditions still improving because oil has held up
- Household debt service ratio in the U.S. is low compared to past cycles
Snapshot of Prior Tops
How To Play The Long Side
- We like commodity stocks, tech, and healthcare
- Commodity dependent emerging markets should run too
See full slides below.
U.S. Equities – If You Can’t Beat ’em, Join ’em
About Market SitRep
The Market SitRep is an investing/trading video newsletter that covers macroeconomics, individual equities, interesting charts, geopolitics, philosophy, psychology, and more.