Morning Notes — Cyclical Strength

The cyclical/value rotation from last August and September was based on rising expectations for above-trend global growth. The catalyst was a Fed-led monetary easing cycle over the prior six months as an offset to trade-related headwinds. It was actually the easing cycle and rising expectations for an eventual US-China phase one trade agreement that started the rotation. Note that equities began to reflect an agreement five months prior to the signing date. US manufacturing PMI bottomed in August, stabilized in September and led a five-month recovery in global manufacturing PMI. It’s important to remember that rotation into US cyclical/value sectors happened first. And it’s also important to remember this ultimately led a broad-based equity rally with the S&P 500 reaching all-time record highs. The source of funds for the August/September rotation was large cap Tech and SaaS companies of all sizes (beneficiaries of disinflation). Again, the ~2 week-long rotation out of these names didn’t signal a shift in the future fundamentals of these companies, but it did signal the beginning of a broad-based and powerful bull market rally