The Big Melt-Up, Easier Financial Conditions, and Increased Defense Spending

Moving from oversold to overbought, US Financial Conditions ease pretty significantly, and the need for higher defense spending.

The Big Melt-Up, Easier Financial Conditions, and Increased Defense Spending

Like what you're reading? Share us with a friend.


The Big Melt-Up

Last month, as markets continued to trade in risk-off mode, we made the argument in favor of being bullish through year-end:

We then explored the possibility of a bear case and a bull rebound in even more depth in our last research piece. We highlighted that:

Fast forward one month, and markets did rebound, hard, without signs of slowing down.

The one-liner is that we’ve moved from oversold to overbought in two weeks. The caveat is that we can stay in overbought territory for a while (see summer of this year).

The question is, where do we go from here?

Our base case is that the drivers of this rebound will continue to move markets higher through year-end:

The risks to this view are pretty obvious:

Two key, non-consensus, ideas that are worth flagging:

Both would imply higher commodity prices (think energy and gold) and likely lower “long duration” assets (bonds and tech). So far though, the break below the 50-day moving average is clear.

Aerospace & Defense Outperforms

This year has been all about rewarding what in 2022 did poorly.

Whilst the “long duration” assets rebound has grabbed all the headlines, be reminded that from a sector point of view, since the Middle East conflict began, Aerospace and Defense companies have outperformed tech.

A&D has significantly underperformed both tech and the broader market since 2020, and the reasons are pretty obvious (higher input cost inflation, labor shortage, and supply chain constraints).

But the bigger point to be made is that NATO members ex-US have been underspending on defense for the better part of the last forty years (totaling a shortfall of $1.4-$2 trillion in contributions to defense spending according to Michael Cembalest at JP Morgan).

If you’ve read Scott’s latest Editorial on the geopolitical risks of the European natural gas and LNG supply chain, you’ll know that in order to ensure energy security, this underspending cannot continue. We quote:

There are some long-term narratives that will be with us for a long while. Increased defense spending is definitely one of them.

Emerging Markets in 2024

If rates have indeed topped, then it would be fair to become a tad more bullish on Emerging Markets. Within EM, one country worth looking at is probably Brazil. It’s located far away from conflict areas, it’s resource-rich, has been running reasonable monetary policy (they started raising rates way before Developed Markets central banks), and demographics are in their favor.

As Otavio Costa puts it: “Why would anyone invest in US stocks at 50 to 100 times earnings when you can acquire shares of a well-established Brazilian company trading at just 5 times its annual profits with strong ties to commodity prices? Today's skepticism towards Brazil reminds me of the early 2000s when its respective equity market experienced a remarkable surge of 16-fold.”

Samantha LaDuc’s Outlook for 2024

Roger sat down with Samantha LaDuc (she’s known for “market timing”) last week to discuss her 2024 outlook. Some quotes:

Samantha also sees a lower US Dollar in 2024, and eloquently explains the risks to US Treasuries associated with the BoJ’s monetary policy (the caveat is that she tells us not to panic until there’s a reason to).

Their discussion helps frame the macro backdrop for 2024 from a market perspective rather than an economic one. Worth your time.

Thanks for reading through! Obviously, none of this is investment advice.

Published in: Markets
Diego Tremiterra

Co-founder and Editor-in-Chief. Covers Markets, Business, and Thematic Oversight. Currently a hedge fund Jr. PM, ex-Goldman Sachs capital markets and startup COO.

View articles

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Lykeion.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.