MacroVoices #263 Juliette Declercq: Why Equities Stand On Much Stronger Ground Than Consensus Seem To Believe

Episode Summary

Executive Summary: In Macro Voices episode 263, Eric Townsend and Patrick Serezna analyze market conditions with guest Juliet de Klerk, founder of JDI Research. Key discussions include secular inflation, rising Treasury yields, sector rotation from growth to value, and the outlook for gold and the dollar. Juliet argues that the current bear steepening is healthy for equities, that the Fed should maintain its hands-off approach, and that a continued rotation into cyclicals is warranted. She also notes higher real yields may further pressure gold and support the dollar in the near term.

Main Topics: Secular Inflation and Fiscal/Monetary Policy (Priority: 5/5): Discussion on whether the economy is entering a period of sustained inflation, driven by unprecedented fiscal stimulus and a dovish Fed. Juliet emphasizes high uncertainty and the risk that higher prices could become self-limiting. Treasury Yields and the Yield Curve (Priority: 5/5): Analysis of the recent sharp backup in long-term yields, bear steepening versus bear flattening, and what it implies for equities and financial conditions. Juliet argues that higher yields are warranted and not yet restrictive. Equity Valuations and Sector Rotation (Priority: 4/5): Examination of whether the stock market is in a bubble, using equity risk premium metrics. Juliet contends that the aggregate market is not overvalued and that a sustainable rotation from growth/tech to value/cyclicals is underway. Gold and the Dollar Outlook (Priority: 4/5): Impact of rising real yields on gold and the U.S. dollar. Juliet recommends taking profits on long gold and short dollar positions, expecting further real yield increases, but remains ambivalent in the near term. Commodities and the Reflation Trade (Priority: 3/5): Review of crude oil, copper, and the broader commodity complex. A major correction in crude appears to have begun, while copper consolidates. The hosts discuss implications for inflation expectations and the dollar. Technical Market Analysis and Chart Patterns (Priority: 3/5): Patrick Serezna presents a technical chart deck on volatility returning to markets, including performance of equal-weight S&P 500, momentum-to-value ratio, and key moving average levels for equities, crude oil, and the dollar. Fed Communication and Forward Guidance (Priority: 4/5): Discussion on the Fed's flexible average inflation targeting mandate and its credibility. Juliet expects the Fed to stick to a patient stance and refrain from yield curve control unless markets short-circuit the recovery.

Key Arguments: Higher long-term yields are a natural and healthy part of a cyclical recovery; bear steepening historically coincides with strong equity performance and earnings growth. The Fed's refusal to quantify its average inflation target leaves markets to interpret policy, leading to earlier rate hike pricing and a flattening breakeven curve. Equities are not in a bubble; the S&P 500's equity risk premium is much healthier than in 2000, and recent corrections offered value. The rotation from growth/tech to value/cyclicals is justified by improving earnings prospects for cyclicals and a steepening yield curve that benefits financials. Rising real yields, not just breakevens, are the main driver of higher nominal yields, and this dynamic likely caps long-term inflation expectations and pressures gold. The dollar may experience a short-term squeeze given crowded short positioning, but the medium-term downtrend should reassert once other central banks accept higher yields. Crude oil's correction may be the start of a meaningful pullback after an extended rally, but the secular bull market in commodities remains intact. The Fed should not intervene in the ongoing bear steepening; doing so would risk derailing a virtuous cyclical repricing.

Data Points: S&P 500 level at time of recording: 39.30 - Market down about 30 points after FOMC, unable to go a month without a new all-time high. U.S. Dollar Index level: 91.76 - Consolidating near 92, not yet breaking out. Crude oil price decline: Down over 7% on the day, approaching $9 from the high - Broke trend line since November 2, closed below 21-day and 34-day moving averages. 10-year Treasury yield: 1.73% - Making fresh highs post-FOMC, three-month T-bill yielding 1 basis point. Gold price: $1,730 - Trading around this level after a short-term low at $1,675 in early March. Forward earnings yield for S&P 500: Just above 5% above 10-year real yield - Contrasted with negative equity risk premium in 2000. Cyclical sectors' earnings growth swing: From minus 25% to plus 45% in 2021 - While Fan Mag sector earnings growth expected to drop from 33% to 20%. 10-year real yield forecast: To reach at least 0% from current -70 bps - Juliet expects further 50 bps increase in real yields. E-commerce penetration advance: 4-5 years of growth in 2020 - Questions whether penetration will stick post-pandemic. Bank forward earnings growth vs tech: Rising faster than forward earnings in the tech sector - Justifies rotation into financials. Yield curve bear steepening historical equity performance: Periods of bear steepening coincide with equity price acceleration - Contrasted with bear flattening which triggers crashes. Potential further price rotation from growth to value: 40% price rotation potential for financials vs Fan Mag - Based on convergence of earnings yields.

Pivotal Quotes: "I think a fair answer is that we do not know. [...] we're talking about unpredictable, non-linear human behavior, exacerbated by the high level of macro-uncertainty emerging from the 2021 global macro revolution." — Juliet de Klerk: On whether secular inflation is about to happen, emphasizing high uncertainty. "My message here really is not to look at absolute yield level. That's really not what matters for equity indices or even for the real economy in general. But what we need to look at is how this yield level relates to the outlook." — Juliet de Klerk: On interpreting the recent backup in long-term bond yields. "The global equity market is potentially standing on steadier, not shakier ground, which means that SP 500's equity risk premium is actually likely to fall going forward, eventually offsetting the effect of higher real yields on equity prices." — Juliet de Klerk: On why the current market is not in a bubble and higher yields may not derail equities.

Implications: Listeners should prepare for continued yield curve steepening and a sustained rotation into cyclical/value stocks. Gold may face further downside before becoming a long-term buy. The dollar could stage a short-term rally but medium-term downtrend likely resumes. Crude oil correction is healthy but a deeper pullback may test support. The Fed's patience supports risk assets but inflation expectations need monitoring.