ED HARRISON: Commodities down. Also, bonds up, but stocks also down. That's the tone of the market today. We're taping relatively early for the Real Vision Daily Briefing. I've got Marc Chandler, chief strategist at Bannockburn Global with me, and also Amanda Agati, who's the chief investment strategist at PNC Financial Services Group. Welcome to Real Vision-- or welcome back, I should say.
AMANDA AGATI: Thank you. It's great to be here.
MARC CHANDLER: Thanks, Ed. It's always good to see you.
ED HARRISON: Yeah, it's great to see you guys-- even though, of course, Marc, I see that you're wearing a tie. Neither Amanda nor I are wearing ties, so I'll give you a pass on the old school attire.
MARC CHANDLER: [LAUGHS] Thank you. Thank you.
AMANDA AGATI: Such formalities!
MARC CHANDLER: If it means anything, I've got sweatpants on, too.
ED HARRISON: Excellent. Well, you heard my introduction there, Marc and Amanda. Let me tell you how I'm thinking about this, is that in January time frame, I was looking at the markets. And when I looked across different asset classes, generally speaking, what I would call the tone was a reflation trade.
But the tone that you see today, in today's market, with WTI and Brent off 3%-- 4%, actually, now that I'm looking for WTI-- you have commodities down, you have equities down, but you have bonds rallying, it almost seems like it's the opposite of the reflation trade, as if the reflation trade is taking a pause. Let me ask you first, Amanda, what are you seeing? What are you thinking about that mix?
AMANDA AGATI: Well, we really think that this market has moved too far and too fast. If you think about when this reflation trade really kicked off, it was right after we're in the midst of the Pfizer vaccine efficacy news back in November. And the market has just absolutely been on a tear since then.
The real disconnect for us is this distinction between a sentiment shift-- which is really what we've seen-- and a lack of fundamental follow-through or fundamental improvement. And so the market-- of course, a discounting mechanism-- rallying on the hopes and the assumption that we're going to get right back to pre-COVID, pre-pandemic norms. And of course, we all know that it's a long, strange trip yet to get from here to there with how slow the vaccine distribution and deployment has been.
And so I really think this is more a recognition, finally, of the reality that we still have a ways to go here. We're #notoutofthewoodsyet. And so I think some of the wind is coming out of the sails in the market as that recognition is starting to come into place.
The other thing, too, the market had rallied a number of times over the course of the beginning of the year on the hopes of stimulus and additional kind of catalysts coming into the system. Of course, now, we have the $1.9 trillion coming into the system, and the market's like, all right, well, what have you done for me lately? And so absent a real fundamental improvement and a series of meaningful catalysts over the short term, then we find ourselves in a pretty choppy, directionless market.
ED HARRISON: Right, yeah. Marc, what do you think about that? What's your view here?
MARC CHANDLER: Yes, I agree that there's something macro going on. But I wonder if the pullback in commodities, some of the other markets, are maybe two other things besides a macro explanation. One is just a technical correction.
We've seen this in the stock market before. Like the S&P-- a sharper, deeper, longer-lasting sell-off last month, and it made new highs earlier here in March, and now it's pulling back again. That pullback is still relatively shallow, but I hear you- it's broader. It's including the Russell 2000. It includes the NASDAQ.
But I wonder, too, if-- and here's what I think is going on, and I think maybe to begin with, we look at the commodity space. The reason I think commodities rallied last year was not simply because we were anticipating stronger growth in the US or Europe this year. It was because China was buying and building up their inventories. And now, it seems, as China has begun either slowing down its inventory build or unleashing some of its inventories to help quell price increases, as the factory of the world, we've seen commodity prices back off a bit.
I think oil is partly the same story. I think what's interesting to me about oil right now is that the US has come down pretty hard, both beginning with the Obama administration, through the Trump, and now Biden, coming down hard on Europe's gas, Nord Stream 2 pipeline from Russia. And yet, the recent data suggest that Russia is the third-largest supplier of oil to the US.
So I do think there's been a shift going on in the oil market that's been important, too. Venezuelan oil not available to the US refiners. They like that. Some of the ones, some of the larger refiners, like that heavy crude stuff, so they're getting it from Russia. But I think that in general, we have to be optimistic-- I think officials are optimistic as well-- that growth is going to be accelerating.
But here, growth in Q1, may be a lot of economists have been revising it down-- some soft economic data recently-- but we're talking about, say, above 5%, maybe even above 6% growth in Q2 and Q3. And I think Amanda's point earlier was right as well, that the real inflation scare still lies ahead of us as those negative inflation reads from last spring drop off. So I'm still thinking that come June-- the June FOMC meeting-- I think that the market would have reached what the Fed would regard as substantial progress towards their goals.
I'm thinking next Friday, Good Friday, we get the jobs number for March. And I think the early estimate-- about 600,000-- you make some conservative assumptions for the next three months, April, May, and June, so by the time the Fed meets again, there will be over a million jobs having been created. Unemployment would have fallen, probably, below 6%. And inflation, partly because that base effect, is going to be well north of 2%.
So I think we're looking in a good situation on a macro view, but I'm not so sure that the underlying trends have really changed all that much. There's some churning here, and I think that-- maybe to Amanda's point as well-- is I think a lot of people on the retail side have acted like I have, and that is a move to the sidelines. That easy-- well, seemed to be easy money, the big bull market, I don't know how much it was a vaccine, how much was a US election, both in early November, had a huge rally. Big sell-off in the dollar. And now, it seems that the market's got more choppy, and people like myself, I think, have moved much more to the sidelines.
ED HARRISON: Yeah, I think it's interesting there, Amanda, because when you talk about the churning, Marc's talking about the turning, too. He's talking about moving to the sidelines as well. My question is, so what next?
I mean, you could think about the markets as forward-looking. So the markets looked forward. They said, vaccines, good things are going to happen. Now, we've gotten those good things, but we're still in the middle of a pandemic. So what does come next for the economy/markets after this churning is over? Or is that too broad a question?
AMANDA AGATI: Well, there's a lot to unpack in that question, for sure. I think in the market's psyche, the market's looking for a big stimulative catalyst. So the market wants a massive infrastructure package, right? I always joke that the market is like my five-year-old in a candy store. I don't know why, for the record, I use that analogy, because that's like torturing myself. But it's this idea that the market's just craving the sugar high from more and more stimulus.
And so I think the market would love to see a big infrastructure package. That certainly could be a fundamental catalyst to keep this rally going. But we think that's really tough to achieve. Even in a year where we have Congress as aligned on this topic, we think it's very difficult to get done. And you can't really get it done, in our view, without adding tax hikes into the equation. And so that's going to put the brakes on all kinds of things if that starts to come to fruition.
And so that's the next big exogenous catalyst to come in. At the end of the day, for us, where the rubber meets the road is in fundamentals-- what's happening in terms of earnings growth. And unfortunately, for the S&P 500, we really haven't seen meaningful acceleration and revisions.
We think that there's still a lot of significant points of stress, particularly on the value side of the market. So if you think about what dominates value, it's energy, it's financials, it's consumer discretionary, it's REITs. Where is the fundamental improvement in, really, any of those?
I mean, for energy, I think you could argue, perhaps, WTI rallying is a little bit helpful for the E&P companies. But everyone else in the sector is still struggling. And when you look at the futures curve for WTI, it's still very depressed-- below 52 or so bucks a barrel. And North American shale production and profitability usually sits, on average, more in the $55 per barrel range.
So a very tough slog still ahead for energy, even with the pent-up demand argument that is still to come into the equation. We're just not seeing pockets of fundamental improvement. And so while the market has rallied to fairly elevated valuation levels, it's not a stretch to say valuations are, indeed, stretched.
I just keep coming back to this idea that the market is effectively pricing for perfection, when, for all the reasons we've talked about so far, the backdrop is really anything but that. And so at the end of the day, the most important catalyst is what happens on the earnings front and the free cash flow front. And I think we rallied assuming that we're going to get back there, but it's just going to take time.
And so that's what I said in the beginning. I think we're in a little bit of a slow-your-roll, kind of choppy, high-volatility regime because we haven't seen that fundamental improvement. We can't sustain ourselves on just stimulus program after stimulus program. At some point, the safety net has to be walked back and the market and the economy has to stand on their own.
MARC CHANDLER: Yeah, I just don't know if we're there yet.
ED HARRISON: The ironic thing-- yeah. The ironic thing, by the way-- I'll let you get in on this too, Marc-- is when Amanda was talking, she mentioned that churning. And we were talking about-- and she mentioned the word "volatility."
Interestingly, obviously, the VIX volatility gauge went below 20. At the same time, you are getting this churning. There's a sense that there's a rotation, this whole rotation that everyone's talking about, of value over growth is being unwound. The Russell 2000 is underperforming relative to the gangbusters growth that we saw post-vaccine. How is it possible that the VIX is showing a muted level when we're getting this level of churning that's going on?
MARC CHANDLER: It's an interesting question. For me, the issue, really, is if we're going to go back to pre-pandemic things, the economy is going to be re-opening. I mean, perhaps, Q3. I think that we're not just not just in the middle of the pandemic. We're at the tail end of it, for the most part. Of course, it's going to linger for years, perhaps, but as far as getting our lives back to normal, I think that Q3 looks like a reasonable timetable.
I mean, think about what the conditions were in the economy before then. And the stock market was rallying. And in late 2019, people also thought the stock market was overvalued, couldn't be justified by fundamentals. And I think that what we're missing in our fair value models is liquidity, and liquidity-driven.
And I think that this is what I think is what we're seeing in other markets-- not to bring it up too much, but to talk about the cryptocurrency space as well. And I think we're seeing lots of liquidity. And where is it going to go? I mean, we're still talking about-- what are we talking today-- maybe $13 trillion or so negative-yielding bonds in the world?
So going back to 2019, it sounds good. It's like, wow, especially after last year. But it really doesn't get us out of this or, really, help answer the questions here. For me, I'd say, the next big catalyst, though, is the opposite of what we have now. And right now, I think what we have is this divergence where nobody has the wallet or the political will to spend like the US.
We're talking about roughly, say, 13 and 1/2%, 14% of GDP between December and this bill that was passed earlier this month. Amanda's right, there's the infrastructure bill coming. I've seen estimates it's $2 to $4 trillion. Some of it looks like it will have to be funded by taxation. That's a tricky issue now.
But I think that this-- so we've got monetary policy divergence, too. I think the Federal Reserve is buying $120 billion a month worth of bonds, Treasuries, and agencies. We've got a very-- so a very aggressive monetary and fiscal policy.
And I hear you about the vaccine. It hasn't ruled out as fast as I wish. I still haven't gotten the vaccine. But the US is doing so much better than most other countries, leaving aside, maybe, the UK and a handful of Middle Eastern countries. So I think that what this means, really, is this divergence, to me, is one of the big themes.
Today, the dollar index is above its 200-day moving average-- or maybe it closed above there yesterday-- for the first time since May of last year. And what strikes me is that the next big move would have to be the opposite of this. What is the opposite of a divergence? Convergence.
Somewhere along the way, it'll click in Europe. They'll have the vaccine. They'll begin rolling it out. Maybe it's a little bit later than us-- a month later, two months later-- but it doesn't negate the recovery there; it just postpones it. And I think it varies, where you might find value.
The European stock market has underperformed the US for years. Every so often, people like myself get it in our heads that this is the year it outperforms. But this year, it's a good chance, partly because technology is not as represented as it is in ours, and the financials, which Amanda mentioned, are more represented, and they're off to-- whatever, up 20% or so this year.
ED HARRISON: Let me go a little bit further with that before I ask Amanda about both-- I'm going to ask you, Amanda, about both Europe and emerging markets, but I want to ask you a little bit about currencies, since I know at Bannockburn Global, you guys are about currencies. I think I was teeing this up to you before, what we were talking about in terms of the reflation trade. And you said, yes, triple divergent monetary, fiscal, and vaccine. And then you talked about the dollar and the euro, the 200-day moving average. Can you walk me through the dollar and the euro and how you're seeing those currencies?
MARC CHANDLER: Sure, I think that the first thing to realize is the dollar rallied initially as the pandemic struck. And since March of last year, the dollar has actually been trending a bit lower against all the major currencies. And the bottom of it, the dollar's bottom so far, was in early January. It was that Wednesday when people were marching in the capital and when the ADP report a worse-than-expected jobs report estimate. And it did lead to new dollar sales.
That marked the bottom of the dollar, and I think what we're seeing now has really been an upside correction. We're just getting past those Fibonacci-type retracement that people look for. And so I think that what we're seeing, though, is primarily a correction to what happened in the November and December.
Election vaccine dollar slide the last two months. We get the correction, and I think it maybe has a little bit more legs to it. But it's not like we just discovered the stronger dollar; the dollar's been rallying. This is finishing up the third month where it's been generally firmer. And I think again, it's being driven by higher interest rates, and there's a broader sense of divergence.
And so I look for further dollar gains, but I'm still a dollar bear in the big picture, thinking that the third big dollar rally since the end of Bretton Woods is over, and that after this upside correction, the dollar's downtrend will resume. And the framing for that, I suspect, will be the twin deficits.
Most of our trading partners have budget deficits. Nearly everybody in the world has a budget deficit. But the US is one of the few large countries-- I think of the eurozone, Japan, China-- that has-- the US has its large current account deficit.
And the cost of this rapid expansion, this huge fiscal stimulus, I think, is going to be a larger net import. That is to say that we're going to be importing more. Our trade deficit is going to worsen. And so just at that moment in time when everybody and the mother is long the dollar and talking about divergence, I think that that's when convergence comes back. And when it does come back, it's the twin deficits that act as the Achilles' heel for the dollar.
ED HARRISON: Right, interesting. So Amanda, to you on that, but from an investing perspective. Convergence-- meaning that after we get the delay in Europe-- which we're getting now, because they're in lockdown-- that eventually, they'll come forward. How do you play-- first of all, is that your base case? And then, how do you play that? How do the emerging markets figure into this, as well?
AMANDA AGATI: Well, there's a lot to unpack in this story. I want to make sure we go back to the high volatility story, too, because I think that's an important part of this dynamic. We're actually bullish on emerging markets. We've used the sell-off-- or the slight correction-- that we've seen in EM over the last few weeks as an opportunity to re-balance, not only tactically, but also strategically. So we're making adjustments thinking a very long-tailed horizon, not just 12 to 18 or even 24 months.
And we've funded it from developed international. So I think I'm on the opposite end of the trade from Marc, unfortunately. But we really think that the story in terms of the thesis around emerging markets is really powerful, and we're actually at one of those inflection points.
The shift between developed and emerging tends to happen over very long cycles, 10-plus years in the making. And so we think that this is a pivot point for the baton to be handed off from the developed world to the emerging world. If you think about emerging market countries, they've been-- if you