There’s an interesting debate playing out in markets right now. In fact, it’s presenting investors with a “wonderful opportunity,” says Hedgeye CEO Keith McCullough.
Wall Street economists have been downgrading their already lackluster year-end 2017 U.S. GDP estimates. Bloomberg consensus currently puts that number at 2.2%. Meanwhile, Treasury yields have been falling and gold prices have picked up, exactly what you’d expect to happen as U.S. growth slows. In the past month, the 10-year Treasury yield has fallen almost 39 basis points to 2.238% and gold prices are up 4.4%.
Look back still further and macro markets paint a completely different picture. Gold prices are up just 1.4%, with massive volatility after a post-Election Day cliff-dive, and 10-year Treasury yields are up 47 basis points over that same period. In other words, this is exactly what you’d expect as U.S. growth accelerates.
As we pointed out earlier this morning, this conflicting signal extends to U.S. equities too. Consider what happened last week across U.S. stock market “style factors” versus the 6 month trend:
1. High Beta Stocks (the stocks that move the most when the broader stock market heads higher) were down -2.4% versus +13.3% in the last 6 months
2. Top 25% Sales Growth Stocks corrected -1.6% versus +10.6% in the last 6 months
3. Top 25% EPS Growth Stocks corrected -1.7% versus +10.9% in the last 6 months
*Mean performance of Top Quintile vs. Bottom Quintile, S&P 500 Companies
What’s right? The immediate-term selloff or the longer-looking trend?
In the video above from The Macro Show today, McCullough explains why last week’s selloff is a “wonderful opportunity” to buy Quad 1 assets (things that go up when U.S. growth is accelerating and inflation is cooling down) from our Growth, Inflation, Policy (GIP) model.
“The trend is your friend from a U.S. growth perspective,” McCullough says. “If you get both growth and inflation right you get most things in macro right.” That means get long real growth which includes the Nasdaq (QQQ), high-end consumers, via Realogy (RLGY), the Consumer Discretionary sector (XLY), he says.
