By Louis Miller, flow sales and trading strategist at Goldman Sales.
8 Quick Equity Macro Observations:
1. Commodities (BCOM) vs Commodity Related Equities showing a negative divergence (Chart 1). Equities are more wary of reflation than commodities at this time whereas the exact opposite was the case in early to mid-2020. BCOM and this basket are not apples to apples, but it shows a non-confirmation at recent highs. This is also a reflection of positioning and fwd outlooks vs spot. We also see similar divergences in oily levered equities vs long-term crude and our global copper basket and copper.
2. Cyclicals/Defensives have not traded well post ISM manufacturing peak (chart 2). Much of the price action in the past month is consistent with mid-cycle slowdown phase of ISM cycle, which have been well document elsewhere. Since Mid-June, Mega Cap Tech has outperformed Non Profitable Tech by 13% (Chart 4), Large Caps has outperformed Small by 7%, Strong Balance Sheet has outperformed Weak Balance Sheet by 13%, High Stable Margin has outperformed Low Variable Margin by 8.7%.
The rate of change of inflation expectations remains key in driving reflationary rotations (rather than the level), Chart 3 displays the Sharpe Ratio of a Cyclical vs Defensive market neutral portfolio relative to the rate of change in breakeven. The gradual repricing of the Sharpe Ratio lower means that the outperformance of cyclicals is likely to keep on becoming less clear and choppier unless inflation data significantly surprise to the upside.
3. Equity implied inflation expectation remains elevated despite recent repricing lower of growth and falling inflation breakeven (Chart 4). Input cost issues remain a concern this earnings seasons with a number of misses so far (KMB, CAG, KO, Unilever, SAM)
4. Credit levered equities are no longer outperforming with HY Spreads near lowest level in decade (Chart 5). HY Spreads are really tight with potential tightening rhetoric ahead and the rate of change of US growth slowing.
Shorting equities with high probability of default vs those low probability of default is consistent with an up in quality, more discerning equity market, and doing so in equities is lower carry (50-60bps)
5. There are nascent concerns about execution of back-to-school and return to office with delta variant dynamics being discussed (chart 7,8,9). Mall levered retail (GSCNSMAL Index) where we have active views and handful of other companies (PLAY, PLCE, CRI, AEO, ANF, BFAM, DKS, FIVE, UA etc) as well as our office reits basket (GSFINOFC Index) are worth monitoring. More simply, one can leverage the GS Outside Basket {GSXUPAND Index} bullish or bearish depending on view (it has traded ~20% total (in different directions) in past 5 trading sessions), which would be the most liquid implementation. Since memorial day, Stay at Home has outperformed Go Outside by 21%.
6. Seasonality is not favorable Scott Rubner noted this week that August seasonals are not market friendly and trend lower all of August, for the 4th worst two-week seasonal period of the year. Jackson hole is the low point of Chart 10. Since 1950, there have been 19 times in 72 years that the S&P is up at least >10% through the first half of the year. The median return for August specifically, following a strong 1H is typically down -51bps, before rallying higher. Equity inflows are not common in August. Over the last 30 years, August typically see the largest outflows of the year. -15bps of AUM typically leaves stock market funds in August, on ~22 Trillion, we model -$33B worth of equities for sale.
7. Infrastructure Stocks have outperformed other non-industrials/materials (GSPUINFS Index) driven by stronger earnings revisions (chart 10). The market appears to be pricing the view that Democrats (or the bipartisan group) succeeds in increasing infrastructure spending without much change on the tax front.
8. Equity market is more vigilant about a potential U-turn in rates with long duration equities stopped outperforming. A lot of the high multiple tech outperformance was unwind early spring underperformance, and these equities dont fully reflect the move lower in rates here.
Here Are GS Top Market Observations
