Morning Notes — Cyclical/Value Exposure

Equities should have further upside for the next several months/quarters as we enter the early stages of a cyclical recovery.  In my experience equity multiples wont rerate in the presence of accelerating global growth.  Questions around valuations probably won’t arise until there’s a negative macro development.  With this in mind, the current question is where to invest to maximize the upside. Growth stocks took a hit in mid-February when 10-year Treasury yields released through technical resistance at ~1.45%.  As a result, the NASDAQ 100 (NDX) declined to our pre-determined support level in the 12,200-12,400 range.  At that point, we expected growth would benefit from a period of mean reversion with the NDX ultimately testing the February high of ~13,808.  That’s happening now, but the recent relative outperformance from the NDX is closer to the end than the beginning.  We’re expecting a successful test at ~13,808 with upside to maybe ~14,200 before the index struggles to move meaningfully higher. The recent acceleration in the S&P 500 (SPX) is mostly due to its heavy weighting in a handful of growth stocks that also reside in the NDX.  These familiar long-cycle stocks (FAANG or FANMAG) are positively correlated to 30-year Treasury bond prices/inversely correlated to bond yields.  While there could be a little more consolidation in bond yields, the time to start adding more cyclical/value and small cap exposure is now.  Residual strength in growth over value over the coming days should be used to rotate away from NDX names.  Value sectors started to underperform a full two weeks before 10-year yields pressed to its recent cycle high at 1.74%.  The corrective action in cyclical/value stocks has already taken place and these groups will extend further/faster than the NDX and SPX in the months ahead.