I Know I’ve Said It a Million Times
You don’t ever trade a market in a direction counter to its Fundamental Gravity. Period. For the uninitiated, a market’s Fundamental Gravity is dictated by the growth, inflation and central bank policy of the market’s underlying economy. Nothing impacts asset prices more than economic conditions and the way central banks respond to those conditions.
U.S. growth has been accelerating since it bottomed last June. The official calculation for Q1 2017 GDP backs up this statement, and the data from April and May indicate that the growth trend remains intact for Q2.
From an economic perspective, industrial production is sitting at a 28-month high and has accelerated for five straight months. The annual pace of U.S. productivity has accelerated for four straight quarters and is sitting at the fastest pace in the last two years. Not only that, but even though the U.S. economy is extremely late cycle, the labor market continues to hum along, creating new jobs at a nice pace.
To top it all off, U.S. corporations just experienced their best earnings season in 13 years.
The bottom line is that the U.S. Fundamental Gravity is extremely bullish for U.S. equities, especially high growth sectors.
In the last 12 months, U.S. technology stocks have gone up 32% and experienced a 6% drawdown. U.S. small caps have gained 20% while experiencing an 8% drawdown.
Meanwhile, U.S. utilities have gained just 12% with a 12% downside risk, and long-dated U.S. Treasuries have actually declined 3% and experienced a maximum drawdown close to 18%. Ouch!
My friends, Fundamental Gravity is the reason that stocks from Silicon Valley have outperformed Treasuries by 3,500 basis points with one third of the risk, and nearly tripled the return of utilities with half the downside risk.