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Today we have 3 suggestions for portfolio positioning in 2H 2019. First, overweight US equities; ever more negative global interest rates over recent weeks are a warning sign. Second, expect more volatility from late July (post Fed meeting) through October; seasonality and fundamentals align on this point. Lastly, be cautious on US small caps; they are more cyclical than large caps and are levered to financial conditions.
From a fundamental standpoint, nothing much good happened in the first half of 2019. Specifically:
US-China - Trade - Deal - Press - Accounts
We didn’t get a US-China trade deal, and based on current press accounts we’re further away now than we were on January 1st. Moreover, bilateral tariffs are higher now than just a few months ago and apply to more goods.
Corporate earnings growth has been slipping. For example, first quarter S&P 500 earnings were slightly negative as compared to last year. Analysts expect the same for Q2, and margins are lower than a year ago for both quarters.
Growth - Economy - Spot - Eurozone - Contraction
Slowing global growth. The export-driven German economy, long a bright spot in the Eurozone, likely slipped into contraction in Q2. Japan’s economy managed to post +2.2% GDP growth in Q1, but Q2 will almost certainly be slower. China’s economy has benefited from some easing of financial conditions, but trade tensions are clearly taking a toll as we start Q3.
But all this added up to a nice rally for global equities for the first 180 days of the year.
Reason - Dichotomy - Capital - Markets - Assumptions
The reason for this seeming dichotomy: capital markets have reset their assumptions not just for current central bank policy but more importantly for long run “neutral” interest rates. Here is how that played out in 1H 2019:
On January 4th, Fed Chair Powell morphed from hawk to dove. The reason: then-elevated US stock market volatility caused by US-China trade war uncertainty. Over the course of 1H 2019, markets...
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