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Morning Notes — Duration of Cyclical Rally

Sector Performance

July 15, 2020

The past three sessions have been characterized by cyclical sector and value-style leadership. Equity market rallies on cyclical leadership are considered more sustainable/healthier that rallies with defensive sector leadership. And new highs on defensive sector leadership are considered unsustainable. The past three sessions of cyclical/value sector leadership is clearly positive for the health and sustainability of the rally. Yesterday we said the strength in cyclical sectors is unlikely to evolve into a broad rotation out of secular growth stocks. To be clear, the term ‘secular growth’ doesn’t refer to FAANG or stocks trading at unjustifiable valuations. The term refers to perennial beat-and-raise companies with achievable 10-year DCF valuations that are 30-40% higher than current levels. I said ‘unlikely’ to evolve into a broad rotation because the downside thus far has seemed orderly and there’s enough cash on the sidelines (understatement) to add cyclical/value exposure without using secular growth as a source of funds. Nonetheless, it deserves monitoring because these names have massively outperformed since the late-March low and the valuation gap between growth and value (Financials, Materials and Energy) has never been larger.

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