Now Rotate!
Now Rotate!
Got this as a forward? Sign up to receive our future emails. 
June 9, 2017
Now Rotate!
Last week, we detailed the dynamic relationship between the “reflation trade” and the “secular stagnation” trade.  Between Election Day and Inauguration Day, the reflation trade constituent returns (US small cap value and financials) outperformed the secular stagnation trade constituent returns (technology and utilities) by 15%.  Conversely, Inauguration Day through two days ago, the secular stagnation trade outperformed the reflation trade by 15%.  Interestingly, they have both advanced 16% since Election Day; what has differed is timing.  From our perspective, the current backdrop now supports a rotation back toward the reflation trade and away from the secular stagnation trade…as discussed in this CNBC spot today: 
The Investing Decision
While dramatic market rotations make for interesting discussion, trying to trade these rotations is treacherous.  Equally dangerous is trying to ride momentum, as yesterday’s technology buyers learned today.  Cooler headed investors must elevate their market observations to determine whether to be “in” the game at all.  Here are the variables current investors must consider:
  • Global GDP growth running 3-3.5% with broad international participation
  • US GDP growth running 2%+
  • S&P 500 corporate earnings growth solid – 2017e 10% higher, 2018e 12% higher
  • Inflation expectations subdued - 5 year forward inflation expectations currently 1.87%
  • Interest rates anchored - 1% Fed Funds rate, 2.2% 10 year Treasury yield
  • Central Bank Policy accommodative – ECB at 0%, Fed hikes next week to 1.25% then stops
  • Valuations fair given prevailing interest rate environment – 3% Treasury = 33x S&P 500 PE
This array of positives encourages equity ownership.  Whether you want to overweight the reflation trade or the secular stagnation trade is a secondary decision.  That’s the difference between investing and trading.  The investing decision determines participation, the trading decision determines preference. 
Assessing the Tail Risk
Wall Street loves to emphasize and debate lower probability events.  Discussing the slow grind higher in the economy/markets doesn’t boost viewership like discussing impeachment.  To that end, there are always a list of knowable positive and negative surprises swirling about.  Currently, the negative tail list includes Trump impeachment, trade wars, Chinese economic collapse (always on the list), large scale terrorist attacks, North Korean nuclear games and tensions in the Middle East (also always on the list).  On the positive tail list we have the potential for tax reform, regulatory reform, health care reform (also a tax cut), infrastructure spending and capital repatriation.  This list requires legislative approval, which may seem improbable, but less so than impeachment?  The risk of a tail event, based upon the knowable, clearly tilts to the upside.  Remember, surprises can be negative or positive.       
Bottom Line: Based upon the backdrop of growth, earnings, inflation, interest rates and valuation, you should own this market.  Whether you want to own the pro-Trump reflation constituents or the anti-Trump secular stagnation constituents is up to you.  Either way, you likely win as the rising economic tide lifts all boats.  Lastly, “tail event” discussions engender fear and greed, currently juxtaposing impeachment vs. tax reform.  If the probabilities of negative tail events heavily outweigh the probabilities of positive tail events, investment hedging is warranted.  Based upon the current array of tail risks, our assessment finds risks tilted to the upside.  With the fundamentals favorable and the risks to the upside, the debate between which trade wins in the short run is fun…but superfluous.   
Have a great weekend!

David S. Waddell
CEO, Chief Investment Strategist
Email Disclaimer:  This communication and its content are for informational and educational purposes only and should not be used as the basis for any investment decision. The information contained herein is based on publicly available sources believed to be reliable but not a representation, expressed or implied, as to its accuracy, completeness or correctness.This information presented is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. No information available through this communication is intended or should be construed as any advice, recommendation or endorsement from us as to any legal, tax, investment or other matters, nor shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction. 
Sources include the Big Charts, Wall Street Journal, CNBC, Factset, Morningstar, Marketwatch, St. Louis FED, BEA, S&P and Bloomberg. This information presented is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. No information available through this communication is intended or should be construed as any advice, recommendation or endorsement from us as to any legal, tax, investment or other matters, nor shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction. Nothing contained in this communication constitutes investment advice or offers any opinion with respect to the suitability of any security, and has no regard to the specific investment objectives, financial situation and particular needs of any specific recipient.
This email represents the opinion of W&A and is for informational purposes only.  It is not a recommendation nor is it intended to be construed as tax or legal advice by the recipient.  Past review of investments are no guarantee of future results.

David S. Waddell
CEO, Chief Investment Strategist

W&A 2016 State of the Union Address

W&A State of the Union 2016
David S. Waddell:
"Choosing the Right Partner"




W&A's CORE VALUES
  • We care about our clients and associates as family
  • We require ethics, intelligence, and competence in our associates
  • We hold ourselves accountable by practicing the planning & investment advice we recommend for our clients
  • We place equal emphasis on financial planning, investment management & communication

"Performance is not an outcome, it's a discipline."
David S. Waddell


5188 WHEELIS DRIVE, MEMPHIS  
7100 EXECUTIVE CENTER DRIVE, NASHVILLE
USA DIRECT +1.800.527.7263
powered by emma