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Since the beginning of 2017, momentum/growth stocks have massively outperformed value stocks. Over the past year, this long ‘mo’ trade further spread across sectors and markets as trade tensions escalated and global growth slowed. In short, this became a very crowded and ostensibly ‘defensive’ trade. As an example of how this momentum extended well beyond technology stocks, consider the materials sector and aluminum can maker Ball Corp (BLL). The shares are up 57% YTD while earnings estimates have declined during 2019 [top right chart]!
We believe a number of uncertainties including the U.S.-China trade war, Brexit, and the fluid Italian political situation have driven the Eurozone’s economic slowdown. In an attempt to change the deceleration in growth, over the past few months, ECB President Draghi has strongly signaled that the ECB will restart a sizeable asset purchase program at tomorrow’s monetary policy meeting.
• Following the U.S. election back in 2016, stock correlations dropped and remained low as President Trump pushed through his tax reform package and global growth picked up following central bankers’ ‘truce’ to end a damaging competitive devaluation process. The opposite has occurred in recent months into the U.S.-China trade war, waning U.S. fiscal stimulus, and investors beginning to question central bankers’ abilities to bail out the global economy and markets.
We remain bearish, given our views that (1) the global economy is poised to decelerate at an even faster pace as President Trump’s tariffs increasingly create drags on sentiment and spending; and (2) Fed rate cut expectations are overextended, unless it becomes apparent that U.S. real GDP growth is heading toward 1% (or lower)
Earlier this week, the Conference Board released its consumer confidence report for August. The overall reading of 135.1 beat consensus expectations and was down only modestly from the prior month. However, we’re more interested in the divergence between the Expectations and Present Situation components.
We strongly believe that the trade uncertainty has been the primary catalyst behind the global growth slowdown, and that the recent escalation in trade tensions should lead to additional economic disappointments. Importantly, our sense is that President Xi currently holds the upper hand in negotiations, given his apparent willingness to ‘pump credit’ once again and ‘wait it out’ until the 2020 U.S. presidential election.
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