Morning Notes — Liquidity Boom

With the SPX now through 3000, it makes sense to focus even more attention on internal signals in sector and cross market divergences. The years-long disinflation cycle has pushed two highly cyclical sectors (Materials and Energy) into the ‘value’ style along with Financials that rely on higher bond yields/steeper yield curve to make money. The S&P 500 Value Index (SVX) has vastly underperformed the SPX over any period, except the past month. Other cyclical sectors like Consumer Discretionary and Industrials have underperformed the broad market, except during the past month. The ~month-long outperformance in cyclical sectors reflects a massive surge in liquidity with US M2 money supply increasing +18% in the last two months with the most acute phase still to come. And the recent trend may be less about ‘rotation’ (out of growth) and more about balance as investors hedge the potential for some form of inflation. At the very least, I’d stay open minded to the possibility and keep an eye on sector divergence for early clues. Also keep an eye on the US Dollar Index as lower levels are an early indication of accelerating global growth. And also the price of Copper (especially vs Gold). At the moment, these internal/cross market indicators imply we’re close to the beginning of an economic cycle.