The trade that's not working
EDITOR'S NOTE
It's late April, early May. Prices are spiking everywhere. Lumber has soared. Food costs more. Everything costs more! Interest rates are rising. TikTokers are passing around terrifying charts of the M1 money supply. BUY CRYPTO!!! they warn. It's a commodities supercycle!! the experts say.
Just as you put the inflation trade on--it's over. This has been a dramatically different market over the past six weeks or so, one that's much more reminiscent of the pandemic-driven 2020. And in fact, the spread of the Delta Covid variant may well have something to do with it.
What do I mean? Lumber has plunged. It's wrapping up its worst month in history--down 42%. Prices are actually now down 13% on the year, the first time since 2015 they've been negative this far into the year. It's still about doubled from pre-pandemic levels, but at the peak of the trade this year--in early May--prices were up more than fourfold. It's been a huge about-face.
What about copper? Jeff Currie of Goldman may absolutely be right that it will be one of the biggest beneficiaries of the electrification of everything--the "new oil," he dubbed it. But it's still down 10% this month, its worst month since last March. Freeport-McMoRan, the big copper miner, is down 15%. "The trade is not working!!!" I hollered to Kristina yesterday.
There's more. Obviously, crypto has collapsed (Bitcoin is down by more than half). It was, in retrospect, the first sign not that the markets were about to roll over--stocks have been holding up fine--but that the inflation trade was about to hit the skids.
What's been supporting stocks is the resurgence of the growth trade that was the hallmark of 2020. Cathie Woods' ARK-K exchange traded fund is up more than 35% from its mid-May lows. Interest rates, of course, have gone completely the other way. The 10-year Treasury yield is stubbornly back below 1.5%.
The reversal has been so strong that for the quarter as a whole, tech is up about 12% (same goes for the Russell 1000 Growth) while the worst performing ETFs include JETS, down 11%, and the banks, which started out as the best-performing industry in the market this year.
And the two things clouding this otherwise clear picture of a role reversal in terms of inflation and growth are housing, and oil. Both of which are still seeing surging prices. But what do they both have in common? Problems with supply. As this fascinating interview with Coldwell Banker yesterday made clear, we have a shortage of four to six million homes in the U.S. On the oil front, we have both a global cartel and an "ESG" one that are curtailing supply.
So the real question, and the only one, is whether this role reversal has run its course. Heck, if I'm writing about it, it has to be just about done with. Right?
See you at 1 p.m!
Kelly KEY STORIES
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