As global economies try to lift themselves off the mat in the wake of the coronavirus pandemic and ensuing recession, many market observers may be fooled by the rapid rise in equity prices around the world. Keith McCullough, CEO of Hedgeye Risk Management, is not. Having experienced a few other financial crises, McCullough and his team are more than skeptical about the strength of the recovery, the spending deployed to help it, and the staggering amount of debt being run up by governments and companies in the wake of the crisis.
[Keith and I discussed Hedgeye's methodology and where the team sees the biggest risks and opportunities in the world in a one-hour webinar this week. If you are interested in their process, please check it out here.]
Keith and his team have developed a proprietary model that frames the global economy in four unique 'Quads" that quantify the macroeconomic patterns shaping the recovery. Each Quad also includes the assets and financial securities that tend to perform better or worse in that time frame. Hedgeye runs these models across countries, industries, and sectors every day to adjust its recommendations to clients who pay for its research, including institutional investors, high-net-worth individuals, and family offices.
As Hedgeye sees it, we are in 'Quad 4" of the current recovery, which is characterized by slowing growth, a deceleration of inflation, dovish monetary policy, and a deflationary market outlook. As such, the stock sectors that are poised to outperform include:
- Consumer Staples
Here's how a sampling of ETFs across those sectors have performed, year-to-date. (These are not recommendations from Hedgeye—we've included them here only for informational purposes.)
Those sectors expected to weaken, include:
It's worth noting that Tech has been the strongest performer of any sector of the market throughout the chaos of 2020, and most of 2019, as well. Here's how a sampling of ETFs across those sectors have performed, year-to-date. (These are not recommendations from Hedgeye—we've included them here only for informational purposes.)
Hedgeye's guidance is not limited to equities, by any means. The team scans the globe for opportunities across fixed income, commodities, currencies and other assets, in search of opportunities to deploy, or remove, capital.
McCullough is particularly concerned about the staggering rise of corporate debt, especially debt that is lower than investment grade, that companies have been loading themselves with even before the current recession.
That debt, coupled with a historic earnings recession, is one of the key risks to the recent rally, as McCullough sees it. While central banks have helped add fuel to the fire with low or negative interest rates around the world, that debt load will become very heavy, and unsustainable for most.
To hear more of McCullough's perspective, and where he and the Hedgeye team see opportunity, listen to our webinar from this past week. I learned a lot from it, and I know you will, too.