About this video

• Video Title: RenMac Off-Script: Shutdown Shenanigans
• Channel: RenMac
• Speakers: Steve Duttonoffer, Jeff Degraph, Neil Data, Steve Pavler
• Duration: 00:40:34

Overview

This video is a discussion among colleagues from RenMac about current market conditions, economic data, and policy. They touch upon client sentiment in London and Chicago, market indicators like the put/call ratio, the potential impact of a government shutdown, labor market data, and sector performance. The conversation also includes a mailbag segment addressing a question about the healthcare sector and discussions about upcoming events and personal interests.

Key takeaways

• Market Sentiment and Strategy: While there are pockets of strength, the market is not at new highs, indicating a "three steps forward, one step back" scenario. The advice is to buy pullbacks rather than chasing strength.
• Government Shutdown Concerns: The shutdown is seen as political brinksmanship with minimal immediate economic impact, though a prolonged shutdown, especially with potential layoffs instead of furloughs, could have a more significant effect.
• Labor Market Data: Despite the lack of official BLS data due to the shutdown, other indicators like the Conference Board labor differential, ADP, and ISM suggest a slowing labor market.
• Healthcare Sector: The healthcare sector is in a "bottoming" zone, particularly small-cap healthcare, which is showing leadership, although large-cap healthcare remains debatable.
• Policy Uncertainty: Significant policy uncertainty exists around the Affordable Care Act, pharmacy benefit manager reform, and drug/vaccine approvals, which could impact investor decisions in the healthcare sector.
• Market Cycle: A low growth and cooling inflation setup is seen as bullish for equities, with a focus on where the market is heading rather than current negative news.
• Tariffs and Industrial Policy: Tariffs have had a muted economic impact due to mitigation and exemptions. There's a growing trend of industrial policy with increased federal involvement in strategically important sectors.

The "buyer frenzy indication" measures how much people are willing to pay in excess for upside exposure compared to downside exposure. This suggests a potential recklessness when individuals are eager to gain from potential upside without concern for the downside. Currently, this frenzy is being observed in some semiconductor names (though not Nvidia) and a few other specific companies, approximately ten in total. The speakers advise caution and suggest it's not a place for new money, but rather a tactical observation rather than an indicator of a market top.

There are a few key differences in the current government shutdown situation compared to past cycles:

• Party Roles Reversed: Typically, Republicans use shutdowns to force concessions. This time, Republicans are advocating to keep the government open, while Democrats, in the minority, are trying to use their position to force concessions.
• Potential for Layoffs (RIFs): The Trump administration is considering "Reduction in Force" (RIF) layoffs instead of furloughs. This would mean actual job losses with no back pay, a more severe economic impact than previous shutdowns where workers were eventually repaid.
• Competing Republican Voices: Within the Republican party, there are differing views. Some want to keep the message simple and reopen the government, while fiscal conservatives argue against funding non-essential functions and personnel.

Despite these differences, the market reaction has been familiar, with shutdowns generally being viewed as political brinksmanship that doesn't have a significant long-term impact unless they extend for a prolonged period.

The healthcare sector has been in a prolonged period of underperformance, historically speaking. However, there's a notable shift occurring:

• Overall Sector: While the broader healthcare sector has been in a "bottoming" zone, its relative performance, particularly in large-cap companies, has not been as strong. Despite recent positive movement ("rip"), it hasn't shown enough sustained upward trend for satisfaction on a relative basis.
• Small-Cap Healthcare: The most impressive area within healthcare has been small-cap healthcare. This sub-sector has shown definitive improvement over the last two to three months and is currently leading large-cap healthcare by a significant margin. The advice given is to invest in small-cap healthcare if one wants exposure to the sector, as this strategy has been working well.
• Large-Cap Healthcare: This remains "debatable" and has not shown the same strength as small-cap healthcare.

The recent positive movement in healthcare is seen as potentially policy-driven, but the speakers caution against chasing these names immediately, suggesting opportunities for them to settle out.

SERM stands for Standardized Excess Return Model. It's described as a metric used to measure alpha over an extended period. The core idea behind SERM is that in efficient capital markets, alpha (risk-adjusted returns) tends to revert to the mean.

Here's how it relates to the healthcare market:

• Mean Reversion Principle: The model suggests that if a sector has excessively high alpha, it's expected to revert downwards, and conversely, if a sector has very negative alpha (meaning it's performing extremely poorly relative to its risk), it's often a sign of a bottoming out, leading to potential consolidation, mergers, or eventual recovery.
• Healthcare's Current Position: According to the SERM, healthcare is currently in that "bottom zone." This implies that conditions are so poor that they signal a potential turning point, where digging further down is unlikely and the sector may be setting up for a recovery.
• Implications for Investment: While the SERM indicates a potentially bullish setup for healthcare, the speakers caution that it's too early to chase these investments aggressively. They are looking for further confirmation, such as improved relative performance, especially in large-cap healthcare, before being fully convinced. The strength in small-cap healthcare, however, is seen as a more concrete signal.