Reopening Trade = Value Trade

The most consensus opinion I hear in the financial media and individual investors is being long value stocks and being in reopening trades.  Reopening trades are basically this:  financials, industrials, materials, and energy.  Mostly value sectors of the market.  Sectors that work better when interest rates are rising.  It worked from late fall to spring, but since April, its been badly lagging growth and the SPX.  

These reopening trades may work, if you see a lot of inflows continue to lift all boats, including value, and when the market is still optimistic about the Fed being able to hike a few times in the coming years.  But they are not a place to park your money if you think the stock market is overvalued.  

Value investors have this quaint notion that since their stocks are "undervalued", that they will go down less during a market downturn.  But these value stocks are the ones that are most economically sensitive, and the market usually goes into a downturn when the economy weakens, making these stocks the most vulnerable.  

I see this a lot among investors and its something that I fall into sometimes, and that is looking in the rearview mirror and extrapolating that into the future.  Since the economy was strong in 2021, and because the Fed is easy, there is still a lot of fiscal stimulus, blah blah blah, that 2022 will also have a strong economy.  Since the Covid cases have peaked, and are coming down, the economy will strengthen.  That's not an insight that provides any edge.  Its just looking in the rearview mirror and extrapolating it in the future.  

Contrary to the consensus view, fiscal stimulus is probably near the end of the road here in 2021, and you can expect 2022 to 2024 to be relatively light compared to what people expect.  Infrastructure spending will be spread out over many years and it seems like the spending number is getting negotiated down by Joe Manchin.  Its still more government spending than anytime from 2009 to 2016, the Obama years, but with the tax increases, its probably not much of a difference from 2017 to 2019. And without additional government spending, the growth will disappoint.  The United States is basically a socialist country now.  Without bigger budget deficits, economic growth will be low.  

There is no organic growth in the US anymore.  Population growth is too low and the population is getting older.  And the productivity growth is nonexistent.  With work from home and the abundance of newly formed daytraders, speculators, retired baby boomers who can now just live off of their assets (thanks to the 2009 to 2021 bull market), productivity is going to go down, not up. 

So the only drivers of the economy are fiscal and monetary policy, and monetary stimulus is near its limits with ZIRP and low 10 year yields.  Basically fiscal policy is the only thing that will move the needle for the US economy.  

I am not just being contrarian for the sake of taking the opposite view of the consensus.  Global M2 supply growth is slowing down, Chinese housing bust all but guaranteed to slow down their economy for the next 2+ years, and less government spending from 2022 to 2024 in the US, you are all but guaranteed to have disappointing growth going forward.  It doesn't mean the stock market can't go up for the next few months, but it means that earnings growth in 2022 will disappoint, and that will coincide with the stock market topping at the same time.  

So based on the above, I just can't picture Jerome Powell ramming through a rate hike into a slowing economy while the stock market is in a firm downtrend in late 2022, early 2023.  Unlike 2018, the stock market has gotten to be a much bigger part of the US economy, as every mom and pop and Robinhood newbie are loaded up on equities.  So the economic consequences of a bear market are that much bigger than they would have been even just 3 years ago.  So Powell in December 2022 will likely face a similar situation as Yellen did in September 2015, and that's see a weakening economy and stock market when they pre-signaled a rate hike.  Yellen decided to punt on that rate hike in September 2015 and got one in on December 2015 just to maintain a bit of credibility (on their pre-signaled hike), not because she thought the economy needed it.  Powell maybe gets through one rate hike during this cycle, but then its lights out for the stock market. 

I still expect higher SPX levels for the next few months, but the end of the road is getting closer and closer, as TINA investors have loaded up the boat with stocks, and they will be the ones who provide the downside fuel during the next bear market.

We have a gap down today after a face ripper rally that faded into the close yesterday.  I don't want to jump the gun and say that this doesn't feel like the other V bottoms that we had earlier this year, but the price action is definitely different than previous bottoms.  First, this pullback is much deeper than the previous ones this year, yet the complacency (other than Monday) remains, as I am seeing so many call the all clear sign after yesterday.  Market participants have been so well conditioned to buy the dip and expect a V bounce every time that I get this suspicion that the market will not oblige them so easily this time.  Second, we are still in seasonally weak time period of the year, ahead of Q3 earnings, and still at the beginning of the stock buyback blackout period that runs through the end of October, so the sellers still have some time to work on this market and take it lower.  

Treasuries got crushed yesterday, and we've broken the tight 1.22-1.38% trading range in 10 year yields to the upside.  I expect a choppy SPX for the next week or two, so I am leaning towards this yield breakout failing and expect 10 yr yields to go back down to the range that its been trading at since mid August.