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- Where is the Momentum as the First Half Comes to a Close?
- Large Cap Growth is an Enduring Theme in the US and Abroad
- Treasuries Remain a Key Diversifier But Shorter Duration May Be in Order
- Gold Can Continue to Shine in the Back Half of 2020
- International Growth Begins to Outperform the SPY
As we reach the half-way point of what has been an extremely eventful year in asset markets, this week we take a step back and assess the current landscape from a momentum perspective. Where is the momentum and how likely is it to persist? Our long-standing view has been that global growth is slowing and is likely to continue to do so. Since we are not economists, we use market-based metrics and trends to assess investors’ views on the likely path of global growth going forward. Our preferred way to see this is in the chart of copper vs gold. We can see that the trend remains down after making a peak in 2018...yes, growth has been slowing for two years plus. A near-term rally has brought the ratio back to the broken support below the declining 200-day moving average. We also note that the recent rally attempt did not produce and overbought reading in the RSI, indicating that momentum remains to the downside. Growth is likely going to continue to be weak / slow and the momentum themes that we lay out in the pages below largely support this view.
A weekly chart of five-year, five year forward inflation expectations points to the potential for rising inflation as we discussed in these pages last week. In particular, we are closely watching the 52-week rate of change to get a sense if investors continue to believe that the fiscal and monetary responses to COVID-19 are in fact leading to inflation in the economy.
From a portfolio perspective, we continue to favor large caps and growth in the US and note that this is a trend that is also evident in equities outside the US. We also feel that investors would be well served in allocating to medium duration treasuries as a way to diversify equity exposure. Finally, gold remains a key allocation by our work as a way to protect portfolios in the event that inflation is rising.
Continue to focus strategic allocations in the areas of the market that exhibit momentum and where odds favor that momentum continuing to remain in place (Bullish and Very Bullish ETF ratings).
As we move into the back half of the year momentum continues to favor the themes on which we have been the most bullish for the past 16 months, namely large caps and growth. The Invesco QQQ Trust (QQQ) is at the top of the leaderboard and has positive momentum across the three, six and 12-month time frames. Additionally, the fund has a Very Bullish Chaikin Power Gauge ETF Rating.
When looking at the ETF Rating for popular funds across market caps, we can see that it is the growth funds that have Bullish ratings while the value funds continue with Neutral ratings. There may come a time when value leads growth again but odds do not favor this trend reversing in the near future.
There is no denying that small caps have seen strength in the near-term but we note that the strength is most pronounced in the growth stocks within small caps. The iShares Russell 2000 Growth ETF (IWO) has a Bullish ETF Rating and continues to outperform the SPY.
Fixed income products have done their job as a portfolio diversifier in what has been a volatile first half of the year for the equity markets. As the trend in global growth that has been in place for more than two years continues to hold to the downside, long-term treasuries have exhibited strong upside momentum.
The question now is what is likely to happen going forward. Last week we began discussing the prospects for an environment of stagflation. If that plays out, investors will look to position in such a way as to limit the erosion of their purchasing power. Interestingly, the iShares Tips Bond ETF (TIP) has seen its rating turn Very Bullish recently and the fund is trading near 52-week highs. Avoiding excessive leverage will be important as growth continues to slow and we can see that BKLN and HYG are at the bottom of the list and do not have Bullish ETF ratings.
Outside of the US, the large cap growth theme is evident as well. Looking at that landscape from a big picture perspective, the only groups that are outperforming SHY (a widely used proxy for cash) are large (IOO) and exhibit growth characteristics (EFG). Both funds carry Very Bullish ETF ratings and have recently begun to outperform the SPY. Investors who are interested in adding equity exposure outside of the US, should consider these funds as part of a diversified portfolio. Note that IOO includes US equities.
Alternative / Thematic Investments
This is not an exhaustive list but simply a group of assets that I like to monitor away from the traditional style buckets as a way to diversify portfolios. Innovation, in the form of the ARK Innovation ETF (ARKK) is at the top of the list and has a Bullish ETF rating. In further support of our view that growth is likely to remain suppressed while inflation has the potential to increase in the near-term, gold and gold miners are also standouts across time frames. NERD provides exposure to the e-sports and digital entertainment theme and has a Very Bullish ETF rating.
Dan Russo, CMT
Chief Market Strategist
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