The Micro and the Macro At the Same Time

Sometimes it’s “macro” time and sometimes it’s “micro” time. Micro time is generally how I refer to earnings season. That is normally when we can take a step back from the bigger picture themes such as interest rates, currencies, policy and stimulus and focus on what companies are saying about their business over the past three months and what they see going forward (to the extent that they have visibility). During earnings season, the marco issues usually get moved to the back burner as investors dig in to the fundamentals of the companies. 

Thus far, earnings season can be described as a “sell the news” event as the major banks put up respectable results but saw their stocks trade lower for the most part. This is actually a disappointment in my view because I had been looking for bank earnings to be a POSSIBLE bullish catalyst for the financial sector. Recall how our progression has played out thus far: we became bullish on the Materials as our inflation theme began to take hold. From there we turned our attention to the Industries which were seeing a big benefit from the transports and then from the names that are tangential to the inflation theme (think DE and CAT). This was all while remaining bullish on the growth themes in the market which continue to be leaders across market caps. 

As earnings season progresses, we will look for subtle changes under the surface of the market for clues that trends may be changing. Thus far, the reactions from the bank stocks tells me that my views remain largely on the right side of the market. It’s interesting to note that the reports from the big banks were not bad, they simply were not good enough. Why? We are now two quarters into the COVID economy. In the early stages, investors understood that management had no visibility into their businesses and were willing to give companies a pass for dismal numbers. True to form, the sell-side analysts took an overly conservaive view regarding estimates, companies beat a bar that was set at draconian levels and stocks moved higher. Now, investors are being less charitable when it comes to reports. It is early in the season and things could change but thus far, companies are being punished for missing estimates and not not being rewarded for beating as we can see in this chart from Fact Set.

So now we know that the bar has likely been moved higher for this earnings season, which would normally give me pause. However, we still have the macro front and center this time around. It is not being pushed to the back burner as so often happens when we move the micro pot to the front burner. No, this quarter, we are going to have to utilize multiple burners (I like to cook). We still have fiscal stimulus. On Sunday, according to Politico, Speaker Pelosi stated that she was optimistic about a deal being done before the election (remember, this is not our base case, but an upside kicker). We have always regarded stimulus as “when and how much” not “if.” If a deal can be reached in whole or in part prior to the election, it would be a welcome bullish surprise. 

On top of that, we have the election on November 3rd. Generally my view here is as it normally is for presidential elections. There may be short-term volatility but the bigger picture trends are not likely to be impacted all that much. Let’s be clear, this is not a political opinion (I do not share that) but simply my view on market expectations and how they could shift based on outcomes. The general consensus is that there is going to be a “blue wave” where VP Biden wins the election and both the House and Senate have Democratic majorities. These views are being made mostly based on polls and betting markets despite the fact that both of these sources got the call completely wrong in 2016. However, if they prove to be right this year, the trends that are inplace will likely continue and a strategy of using oversold conditions to add bullish exposure in equities and commodities will make the most sense.

In fact, most of the possible election outcomes do nothing to change the views that I have currently as they relate to the market. I remain with a bullish bias to equities with a leaning toward growth and certain cyclicals. I remain bearish on the long-end of the treasury curve and prefer exposures with shorter durations. I remain bullish on the inflation theme with a near-term leaning toward the agricultural space while looking for an opportunity in precious metals. 

To me, the biggest risk would be an election that is too close to call, leading one of the parties to contest the result. That level of uncertainty would be near-term bearish for risk assets. 

*This is a excerpt from the weekly note that PortfolioWise users receive every Tuesday*

  
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