It Never Ends Well – February 18, 2020

The macro environment has a goldilocks feel to it, in that:

  • Monetary conditions are very accommodative, and are likely to stay stimulative for a long time.
  • Global economic growth, led by a relatively healthy U.S., is neither too hot, nor too cold.
  • The big threats to the economic expansion in the past two years are on hiatus, including protectionism, Brexit and various geopolitical hot spots; President Trump will want to keep conditions this way during a critical election year.

Investors have been willing to take risk, but mostly in those areas that have performed best and are less exposed to riskier economic areas, reinforced by the ongoing COVID-19 crisis. A just-published MRB report examined the hottest investment theme, namely U.S. growth stocks, where excesses have been building rapidly.

The report continued our thematic series on profiling asset manias, and focused on growth stocks, which have benefited from several major macro themes and related asset mania trends since the Great Recession. However, many of these supporting trends are either maturing and/or now well discounted. We expect that the catalyst for a reversal will be the next global recession and equity bear market. For now, we recommend using strength to scale back positions, and use trailing stop-shorts on growth stocks to catch the eventual downturn.

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