"The countdown reached ten seconds and I could almost hear an invisible crescendo of stirring background music. 'Anchors aweigh!' Five, four, three, two, one ... and we had ignition!" - Gene Cernan
U.S. stocks fell modestly last week while emerging markets continued their outperformance on continued risk rotation by investors positioning for 2013. While the made-for-TV drama known as the Fiscal Cliff continues to grab the airways, the real story is the resurgence in China's equity averages, with the Shanghai Index rallying more than 4% on the week. Improving manufacturing data in China combined with optimism that growth may actually pick up is creating a renewed sense of global risk-on sentiment by market participants independent of what is going on in Washington.
This is a fascinating juncture from a number of perspectives. Looking at European markets, the recovery and strength in company stocks is very much reminiscent of 2009, and the negative narrative appears to be on its way out if the stock market is right about the near-term future of the Eurozone. Emerging economies like India (INP) are in the process of major structural reform, and China (FXI) is opening up its markets to larger foreign investment flows. Brazil (EWZ) has aggressively lowered rates for the past year, and its economy may soon feel the impact of its own easy monetary policy. The global rally simply can not be explained by Fed action alone given the fact that international developed markets began outpacing the U.S. stock market in late May. Rather, what appears to be happening is a return of the global cyclical trade.
But what about the Fiscal Cliff? The S&P 500 (SPY) is essentially flat for the month, and it is clear that the near-term is being defined by whatever comes out of Washington. News over the weekend that John Boehner is willing to include higher tax rates on the wealthy is the first major step to getting a deal done, as it shows willingness to negotiate. I suspect Washington is considerably closer to getting a "framework" done for a Fiscal Cliff deal than the pundits on air might have you believe, which may be all the U.S. market needs to play catch-up with sentiment in overseas risk assets.
Our ATAC models used for managing our mutual fund and separate accounts remain fully exposed to equities and have performed quite nicely in December thus far. We still maintain that new all-time highs are a real possibility in the next few weeks, and the catalyst may be an actual deal announcement. My partner Ed Dempsey spoke about this at length alongside Carrie Lee in his latest YouTube video, which can be seen here. If markets can get past near-term anxiety, 2013 could end up being a very nice year to invest in with a higher "sleep at night" factor than 2012. If anything, rotation within risk-on, as opposed to continued risk-on/off movement, may define 2013 as money favors capital appreciation over yield. I made a big point about this on the Floor of the NYSE in an interview which can be seen here.
If 2013 is to be the year of equities, our ATAC models are uniquely positioned for that given the ability to quickly rotate into areas of the stock market showing outperformance potential on a continuous basis. If 2013 ends up being more of the same with continued pulses of inflation and deflation, the focus more will be on rotating across bonds and stocks as conditions warrant. Either way, we are excited for the rest of the year, and think many will be surprised by how our performance looks for our separate accounts and mutual fund.
A quick note that Ed Dempsey and I will be at Earnest Sewn this Tuesday (December 18th) between 6-8 PM in the Meatpacking District for those interested in shaking hands and talking markets. Plenty of free drinks, and the good people of Earnest Sewn will be offering a special discount for followers of our work who attend. More information about Earnest Sewn can be seen here. Should be a good time.