Legacy Wealth Weekly - Nov 18, 2016 (R.I.P. Growth?)
Penni Johnston-gill - Nov 22, 2016
Weekly Market Wrap-Up: R.I.P. Growth?
Despite a relentless rise in the US$ and bond yields to multi-week highs, equities continued their march upward this week. The S&P 500 (~1%) and the S&P/TSX (~2%) are close to breaking out to 52-week highs. Many indexes such as the large-cap Dow industrials and the small-cap Russel 2000 have reached new milestones already. Investors, for now, are brushing off the ongoing tightening in financial conditions, preferring focusing on Trump’s pro-growth policies. In her testimony this week, Fed Chair Yellen indirectly suggested that all this fiscal stimulation may not be necessary as the US economy is performing well, in line with the expectations of the FOMC committee. Admittedly, strong US economic data (see below) validates the Fed Chair's view. Interestingly, compared to previous bouts of US$ activity, commodities are holding their ground in general. Rising inflation expectations are helping, along with the continued increase in DM and EM LEIs. That said, for now, investors are not accounting for these differences, as they are reducing exposure to risk assets with negative correlation to the US$. We will tackle this issue in our Mid-Week note next Wednesday.
Our focus this week is on the growth vs. value cycle in the US. As our Chart of the Week shows, the price ratio between the growth and value indexes of the Russel 2000 has firmly broken below its 200-week average. This was usually the kiss-of-death for growth as previous downward crosses illustrate. We have had a value tilt for a while so we should not complain. That said, investors must be aware of the exposure breakdown between the two indexes. We can find such exposure below our chart as we plot the relative sector exposure between the Russell 2000 growth (IWO-US) and value (IWN-US) indexes. As one can see, health care, technology, and consumer discretionary are heavily weighted in the growth index while financials, utilities, real estate and energy make up most of the weight in the value index. As such, if the growth cycle is expected to continue lagging, there is no rush for investors to return to the over-loved health care sector, FANG stocks and tread carefully with consumer cyclicals. Conversely, financials and energy may have more “relative” room on the upside.
Regarding economic statistics this week, in Canada, supported by gasoline prices (+3.7% MoM), headline inflation settled at 1.5% YoY in October (from 1.3% and 1.5% exp.). Core inflation, however, slowed down a bit to 1.7% (from 1.8%). In the US, headline inflation also benefitted from a boost in energy prices (3.5% MoM), accelerating to 1.6% YoY (from 1.5%). Our view remains that inflation should break above the 2% mark early in 2017. Meanwhile, retail sales exploded higher with a 0.8% MoM print in October, bringing the YoY growth to 4.3%. Housing starts jumped 25.5% MoM (from –9% last month) but building permits (0.3%) suggest the leap might be temporary. Last, on the supply side, total industrial production came in flat in October due to the weak showing of utilities (-2.6% MoM) but the US manufacturing output advanced 0.2% MoM, supported by durable goods (+0.4%). Elsewhere, in China, retail sales growth slowed somewhat to 10.0% YoY (from 10.7%) but industrial production remained steady at 6.1%. With the Chinese Yuan closing at a fresh 8-year low vs. the US$ this week, a ramp-up in production could be coming. Finally, measures intended to curb speculation on housing seem bearing fruit as home price inflation decelerated to 1.1% MoM in October (from 2.1%).
Next week, aside from flash PMI releases globally, we await retail sales in Canada, durable goods orders and home sales in the US. Finally, trade balance and inflation are on deck in Japan.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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