Value Trade Is Just That... A Trade

The conditions for a sustained “value trade” remain elusive

Highlights

• The conditions for a sustained “value trade” remain elusive

• Beige Book has recession thumbprints all over it

• Copper-to-gold ratio points to lower Treasury yields ahead

• More evidence of the consumer credit crunch

While We Were Sleeping

Yesterday was another epic session filled with confusion — the Dow soared +244 points on the same day that the Nasdaq collapsed -512 points (the -2.8% pullback was the steepest since December 2022). A divergence that conjures up the images of early 2000 after the Nasdaq rolled over and there was a brief rotation into the Dow stocks (today’s gap in market size between the growth and value stocks is so extreme that if investors pulled 1% out of Nvidia and deployed the proceeds into J&J, one of the best performing Dow stocks yesterday, it would boost that stock price by +8%).

The SOX index (-6.8%) suffered its worst drubbing since March 18th, 2020, as the semiconductors got caught up in dual geopolitical risks from rising odds of tougher U.S. export curbs to China and former President Trump’s aggressive comments regarding Taiwan (“Taiwan should pay for defense”). The Nasdaq is now +3.6% above its 50-day trendline — which is the first time it has closed within 5% of the moving average since early June.

This violent shift from growth to value, and mega-caps to small-caps, is being dubbed the “Trump Trade” given the former President’s rising odds of reclaiming the keys to the White House (those odds are going up even more now that Joe Biden’s coalition of Democratic supporters are starting to break and the news that the current President tested positive for COVID-19).

Well, I have news for you. In his prior four-year term, growth crushed value by 72 percentage points, and large-caps beat small-caps by 22 percentage points. Yet another classic case of “pundits” constantly trying to fit a narrative to the price action.

Tack on the fact that commodity prices were flat and bond yields ticked lower, and we have some key non-ratifications over this so-called rotation into “value.” High yield spreads widened out +3 basis points to 297 basis points. Ten-year TIPS inflation breakeven levels remained stuck at 2.26% — if you are a believer in this reflationary “value trade,” this metric should be on the rise, and that is not happening.

Not to mention the -1.1% giveback yesterday in the Russell 2000, the -0.4% drop in the Invesco S&P 500 Equal Weight ETF, the -2% slump in the SPDR S&P Metals & Mining ETF, and the -2.2% loss in the Global X U.S. Infrastructure Development ETF. Finally, the best-performing sector yesterday was the one you want to own in economic downturns, which is Consumer Staples (+1.4%).

We have a bit of a reversal on our hands in the pre-open trade, with Dow futures down a tad and Nasdaq futures well into the green (as Taiwan Semiconductor delivered a positive earnings update). European markets are fractionally in the red column. Asia was mixed yet again: losses in Japan’s Nikkei 225 (-2.4%), Taiwan (-1.6%), Korea (-0.7%) and Singapore (-0.6%) swamped advances in China’s Shanghai Composite (+0.5%), India (+0.5%) and Thailand (+0.3%). The MSCI Asia-Pacific index succumbed to a -0.8% loss, and the Emerging Market complex is set to close lower by -0.4%.

Global bond yields have a slight upward bias and the DXY dollar index is little changed at 103.8 (dollar-yen temporarily broke below ¥156 for the first time since June 12th), but that didn’t stop Brent crude from rising +0.7% to $85.69 per barrel (nice follow-through from yesterday’s +1.6% bounce, but is losing momentum as we move to publish), spot gold from firming further by +0.6% to a fresh record-high of $2,473 per ounce or Bitcoin from rallying +0.5% to $64,871 (all market quotes are time-stamped to 4:30 a.m. ET).

The lone data points overnight were Australian employment, which ran hot in June — jobs expansion of +50.2k versus the consensus forecast of +20k (but the unemployment rate ticked up to 4.1%) — and comparable numbers out of the U.K., which ran a touch cooler. Employment came in at +19k which was a touch below the +20k consensus expectation and barely denting the -139k plunge in May; wage growth eased to +5.7% year-over-year from +5.9%; and the jobless claimant count hooked up by +32.3k after the whopping +51.9k run-up the prior month — all of a sudden, the BoE is back in play.

The Fed’s Beige Book, released yesterday afternoon, had recessionary thumbprints all over it. It may not be evident in all of the government data releases, but the anecdotal evidence is powerful. Fully five of the twelve Districts recorded “flat or declining activity” versus two in the last go-around six weeks ago. This is the exact number (5) we had on our hands in January 2008 and March 2001. Both these months are important because these were the onset of recessions that nobody was calling for at the time (save for me… though as is the case now, I was early on that forecast).