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Morning Notes — Cyclical Leadership/Sustainable Rally

Sector Performance

July 16, 2020

Value sectors: The recent outperformance in cyclical/value sectors follows better economic data (US ESI at record +270.80), some renewed vaccine optimism and expectations for a near term peak in the most recent regional hotspots. The first wave of infections was in the Northeast and the second in the Midwest and Mid-Atlantic regions. A 2-3 week period of cyclical/value outperformance in the S&P 500 occurred several days prior to an eventual peak in both regions. I know the headlines look terrible, but there’s been a recent deceleration in Arizona’s reported new case growth and the states 2-week rate of change in COVID-related hospitalizations has also decelerated since late June. Arizona was one of the first southern states to emerge as a hotspot and TX was about one week behind. Texas infection rates and hospitalizations have been far larger than AZ, but the curves look very similar. The two week rate of change in TX hospitalizations has already decelerated, but the headlines will continue to look terrible even as the infection curves rollover.

More: The recent outperformance in value sectors is a welcome development for the sustainability of the broad rally and shouldn’t lead to a sizeable rerating in growth multiples. Growth/momentum valuations are rich, but those sectors don’t need to be a source of funds for cyclical/value investments…there seems to be ample amounts of cash on the sidelines for that purpose. I should also mention the timing of cyclical/value leadership corresponds with the start of CQ2 earnings season. Financials are the largest and most important of the value sectors and their recent outperformance is partial recognition that Q2 will likely be the trough in bank fundamentals.

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