Morning Notes — Near-Term Caution

Rotation? Visible concerns around stretched valuations in Tech first appeared in early September when impressive earnings failed to generate price appreciation.  Yesterday’s sell off in the group came on the eve of potential vaccine approval and the pricing of several high-profile IPOs. Vaccine approval is an obvious, but potentially underappreciated economic growth catalyst.  Global manufacturing PMI is already expanding at a rapid pace with the US, Europe and Japan poised to add fiscal stimulus in the weeks ahead.  PMI data is our best forward-looking indicator and current levels point to rapid growth 3-6 months out.  This also shows up in indices like the Architecture Billings Index.  An improved economic cycle isn’t bad for secular growth companies with high multiples, it just makes low multiple stocks more appealing.  We expect cyclical/value outperformance without painful rotation out of Tech as long as the 5-year/30-year spread stays below ~140bps.  

Bond yields: This morning’s release of higher-than-expected weekly jobless claims increases the probability for near-term (12/18) US fiscal stimulus.  Today’s slightly less-dovish-than-advertised ECB decision comes with gently higher Eurozone bond yields, which should help the cyclical/value theme without triggering a violent rotation out of Tech.  Expectations for next week’s FOMC meeting remain low, but we still see risk of a ‘sell-the-news’ reaction (sharply higher yields) in the weeks ahead that could lead to a re-rating of Tech multiples.