Morning Notes — Early Cycle

The next major event on the catalyst calendar is Wednesday’s FOMC meeting.  Markets are almost entirely focused on a possible tapering message, but the meeting also includes an updated dot plot (member expectations for future rate hikes).  Last meeting showed 4 members were looking for the first rate hike to occur in 2022, and 7 members called for rate hikes to begin in 2023. A 2+ member increase in the 2022 dot or a 3+ member increase 2023 dot would be an ‘equity unfriendly’ outcome.  But a slight uptick (1 or 2) in the 2023 camp would probably ease lingering concerns for a potential Fed policy mistake and become a tailwind for equities.

Sectors: Leadership shifted to growth from value this week as bond yields declined. Bond yields are still the key determinant to sector performance, with 10-year yields <1.45% leading to accelerating outperformance in growth/Tech.  Earlier this week, the 10-year Treasury put/call ratio moved to extreme overbought levels, which sets the stage for an imminent reversal (prices down/yields up).  Expect bond yields to advance back to ~1.55% in the weeks ahead and then to the 1.62-1.64% range.  The economic cycle is downshifting from hypergrowth to sustained growth with early cycle dynamics still in place.  We stay bullishly biased toward value sectors (Financials, Materials and Energy), but wait for confirmation from yields before adding exposure.