Full episode: Market Call for Wednesday, September 11, 2019
Cameron Hurst, chief investment officer at Equium Capital Management
Focus: U.S. equities
To casually note the benign index movement on Monday would be to entirely miss a very significant market event. Notwithstanding the uneventful index level change, there was a 5 standard deviation rally (read: of a size that’s very rare) in value over momentum. With momentum stocks getting absolutely punished and long-unloved value spiking, the pain and performance bleed in a single day was substantial, leaving investors to ask, how long will this continue?
Vicious mean reversions like we’re now seeing can be particularly tough to navigate. Accordingly, let’s start with a few observations. First, positioning of equity investors is near historical lows both globally and locally. JPMorgan notes the exposure of systematic investors is also low, with CTAs’ equity beta in its 20th percentile and volatility targeting exposure in its 25th percentile. With volatility declining from the August spike, equity inflows are likely to accelerate in response. Add in elevated buyback activity over the next three weeks before the Q3 blackout and you’re going to see significant mechanical buying.
Additionally, we’re seen some recent positive fundamental developments related to Italy, Hong Kong, Brexit, U.S. economic activity (services) and most importantly negotiations between the U.S. and China that are scheduled for October. Regardless of the outcome of these negotiations, there is a three-week window in September where the market can move higher from record-low positioning, if only from buybacks and pronounced short-covering, which was in clear evidence on Monday. Moreover, closing shorts would push value, cyclicals, high-volatility and small-caps to outperform the broad index, while momentum and defensives would lag. For better or worse, this is likely to exacerbate already extreme moves.
After these technical factors run their course over the next two to three weeks, it’s really up to the politicians and central bankers to keep the party going. Given the Fed’s espoused neutral stance and more recent pushback on Draghi’s dovish inclinations, it seems to us Q4 market performance really lives or dies on how much progress is made on trade in October.
Positively, a recession going into an election would be politically devastating, meaning Donald Trump “should” be more willing to compromise as time passes due to the closing pre-election window. Executing a trade deal with China would unequivocally drive the next market rally.
Unfortunately, China isn’t blind to this backdrop and will most probably use it to their advantage in negotiations. President Trump is anything but a pushover, so it’s entirely unclear how trade negotiations will play out. Accordingly, we’re taking portfolio positioning one step at a time. For now, we’ve tactically dialed back our fixed income duration and modestly adjusted equity exposures to ride out the squeeze, not exiting any of our core positions. To go any further in repositioning, we’ll need to see more tangible progress on the trade front and stabilization of global economic momentum.
SPDR REAL ESTATE SELECT SECTOR ETF (XLRE:UN)
We maintain the market environment is more aligned with late-stage than mid-cycle timing and accordingly use real estate to balance portfolio risks, particularly on interest rates. If we’re wrong, incremental defensive exposure like real estate will work better in mid-cycle than other bond proxies such as utilities owing to its modest pro-cyclical tilt.
VANECK VECTORS GOLD MINERS ETF (GDX:UN)
Although neutral on materials, we are positive on precious metals and specifically gold, as fundamentals and technicals are positive.
ISHARES U.S. MEDICAL DEVICES ETF (IHI:UN)
Although we have reduced our healthcare exposure, we remain positive on medical devices as both fundamentals and technicals continue to be strong.
PAST PICKS: SEP. 12, 2018
SPDR REAL ESTATE SELECT SECTOR ETF (XLRE:UW)
- Then: $33.66
- Now: $38.80
- Return: 15%
- Total return: 20%
SPDR HEALTH CARE SELECT SECTOR ETF (XLV:UW)
- Then: $92.69
- Now: $90.78
- Return: -2%
- Total return: -1%
- Then: $111.71
- Now: $135.76
- Return: 22%
- Total return: 24%
Total return average: 14%