Morning Notes — Value

Our preference to add exposure in value sectors began last July.  Since then, the S&P 500 Value Index (SVX) has outperformed the S&P 500 by ~310bps and the NASDAQ 100 (NDX) by ~880bps.  We maintain a preference for value sectors, but wait for pullbacks as Energy and Materials have pushed into overbought territory.  These two sectors will underperform on an eventual de-escalation in Ukraine, and again when these companies report strong quarterly results.  The second decline on strong earnings will likely be the next tactical buying opportunity. Banks kick off Q1 earnings season next Wednesday with the S&P Bank ETF (KBE) in oversold territory.  The KBE has declined for the past seven sessions on curve inversion, recession risk and eventual credit concerns.  The nominal 2/10 yield curve inverted on four separate occasions during the last two weeks, but a lack of consistency, QE distortions, extremely steep short-end curve and steep real yield curve cast significant doubt on the current quality of its recession signal. While bank Net Interest Margins (NIMs) improve during periods of curve steepening, it’s also important to recognize that Net Interest Income will rise as short-term loans reset higher with policy rates.  US banks are also holding large excess deposit balances, meaning they’ll be in no hurry to raise deposit rates, which will increase NIMs at the short-end.