Three big things you need to know: First, one of our key sentiment indicators has started to retreat after hitting extreme levels, which has coincided with a stealth rotation in leadership. Second, we’re starting to see a more broad-based improvement in US GDP expectations, which we see as supportive of continued rotation in stock market leadership. Third, Biden put out his wish list in Thursday’s State of the Union, giving equity investors a taste of his goals in a potential 2nd term.
If you’d like to hear more, here’s another five minutes.
Now, let’s jump into the details.
Starting with Takeaway #1: One of our key sentiment indicators has finally started to retreat after hitting extreme levels.
As our regular readers are well aware, we keep a close eye on a handful of sentiment and positioning indicators for the US equity market. AAII net bulls have been elevated at roughly one standard deviation above the long-term average since the start of the year. When this happens, the stock market tends to be flat over the next three months with below trend gains of about 6.5% on a 12 month forward basis.
sitting a little above early:
While there wasn’t a big change in AAII last week we did see a sharp move lower on CFTC’s US equity futures positioning gauge.
This was driven by a drop in positioning in Nasdaq 100 futures, which had been sitting well above historical highs.
While this has not been accompanied by a decline in the equity market generally, over the past few weeks we have seen a clear weakening in the leadership of the mega growth stocks that have been dominating the stock market ….
outperformance in the Russell:
Moving on to Takeaway #2: We’re starting to see a more broad-based improvement in US GDP expectations.
forecasts has broadened out.:
Even more interestingly than the big move up in the number, we are seeing evidence that the forecasting community has become a little more willing to stick their necks out, as GDP forecasts are now rising for 1Q24, 2Q24, and 3Q24. We have been arguing over the past few months that for the rotation in stock market leadership seen in November and December to resume, US GDP forecasts would need to keep improving and get closer to above-average levels. Historically, Large Cap and Growth outperform Small Cap and Value when GDP is running cool or trending below average, which is about 2.6%, while Small Cap and Value outperform when GDP is running hot. While we aren’t there yet, the temperature is rising quickly.
Wrapping up with Takeaway #3: Equity investors got a taste of the potential goals of a 2nd Biden term in Thursday’s State of the Union.
Conversations with equity investors on the US Presidential election have been frustrating for us, as we’ve only had bread crumbs to analyze in terms of potential policy plans from either candidate. While we still think it’s too early to make big trades on the US election outcome for a variety of reasons, we are pleased to report that there were more policy bread crumbs in Thursday’s State of the Union than we expected to get. We’ve analyzed the stock market relevant comments from Biden’s speech focusing on forward-looking plans as opposed to a recap of missions already accomplished.
Things that stood out to us from a stock market/economic perspective included the emphasis on his foreign policy, immigration and the desire to pass the border bill, individually focused economic initiatives on housing and preschool, and the desire for corporations and billionaires to pay more in taxes but not those making under $400k. We found ourselves a little surprised by how much Health Care was in focus, and how there was a bit less of a focus on reshoring (again, in terms of forward-looking plans) and climate/Energy. The tone on China seemed less harsh than Trump’s. We also took note of a comment on the need to impose some limits on AI and pricing on consumer goods.
We stress it’s still early, and remind investors that Biden would need Congress’s cooperation to achieve most of his goals. But admittedly there is a little bit more for investors to ponder now. Both Biden and Trump have been moving up in the polls and betting markets. We’ll be keeping a close eye on that data to see if the new messaging from Biden has an impact. For now, we’ll end with this thought: the stock market tends to go up in Presidential election years (admittedly less than usual) starting off with a pullback early on followed by better trends in the back half once uncertainty has dissipated.
That’s all for now. Thanks for listening and please reach out to your RBC representative with any questions.
