The US Equity Market Set Up is Bullish

VT Tyndall North American Fund

The US Equity Market Set Up is Bullish

The Q3 earnings season is well under way in America and there has been some investor concern around what companies are experiencing as it relates to inflation and supply chain problems. Some companies have dealt with these problems better than others, some have managed to pass through higher costs to customers and others haven’t. But demand has not been the problem and at some point, the supply chain pressures will ease, and things will get back to normal. Importantly however, these concerns may already be fully priced into the market, as the front pages of Barron’s and The Economist attest; once a story reaches the cover of these two publications you can be pretty sure the market has fully discounted it.

The key part of our bullish view is that as these supply chain issues ease, there will be a growth surge in the US. Inventories have never been this low in recorded history across many sectors and as bottlenecks clear this restocking, and very likely overstocking (just to be on the safe side) will provide the economy with a boost in growth. For an idea as to how tight inventories are, here is the situation in the domestic auto market. The green dotted line being the average from 1993-2019.

Added to this the continued improvement in the Covid case count, which peaked in September and is falling precipitously, some 50% from its recent highs, and you get further support to the economy.

What’s key, and interesting from a market point of view, is that for the first time this year, portfolio managers are not positioned bullishly. In the latest Bank of America Fund Manager’s Survey, a closely followed survey of professional money managers positioning, managers are more cautious now than they been in years. The chart below shows cash levels in portfolios at their highest in the post-covid crash era.

This adds to our conviction level that the rest of the year is likely to be strong. Our macro overlay says growth and inflation will accelerate in Q4 and, with most managers raising cash and being defensive, only makes our non-consensus bullishness more timely.

21st October 2021
Read time : 3  mins

This content is intended for professional clients only.

Data source: Hedgeye Risk Management LLC Bank of America Global Research
Not for retail distribution – this document is intended for professional clients only

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