October 8, 2020
Bond yields: Anticipation of sharply higher government spending under a Biden + Democrat sweep has led to a relatively significant increase in bond yields. Since last Wednesday 9/30, 10-year Treasury yields have increased 21%, rising from ~0.65% to ~0.79% yesterday.
Value sectors: The higher bond yields and steeper curve should support our recent preference for value sectors like Financials, Materials and even Energy. Results the night of 11/3 will impact bond yields and sector performance on 11/4. To date, the outperformance in value stocks has been gentle with money coming off the sidelines rather than sales proceeds from other sectors. However, a realized Democrat sweep on 11/4 could accelerate the move in bond yields, leading to a more violent but short-lived rotation into value sectors. I say ‘short-lived’ because sustained outperformance in value sectors like Financials, Materials and Energy requires a sustained steepening in the yield curve, which requires higher inflation expectations. That could happen over time, but unlikely to happen during any post-election honeymoon phase. At the moment, equity markets seem ok with the prospect of a Democrat sweep but that will change once the dust settles. Markets prefer a balance of power in Washington with fewer legislative changes because a more consistent operating environment makes it easier for companies to plan and invest.
Chartist: The S&P 500 (SPX) is currently testing technical resistance at ~3440. If the market can close above ~3445, we’d look for accelerating momentum (especially in cyclical/value sectors) in a bid to test the 9/2 high of 3580.