October 7, 2021
The Covid situation should continue to improve and extend the cyclical recovery. Btw, Friday’s interim study results on MRK’s oral anti-viral treatment (5-day regimen) looks like a significant step in reducing the impact of Covid. The recent pullback in the S&P 500 has moved many names to short-term oversold status and we’re using the opportunity to add cyclical/value equity exposure. Equity sentiment (contrarian indicator) has shifted from bullish to bearish, hedge fund net equity exposure is now below neutral and systematic strategies have de-risked. Energy prices should remain elevated over the long-term as decarbonization efforts have resulted in an immediate reduction of supply, while demand may take more than a decade to transition. US inflation rates should decelerate in Q4, but remain elevated and above pre-pandemic levels. Inflation breakeven yields have increased faster than nominal bond yields, and our expectation for moderating but elevated inflation should keep the Fed on path to hike rates in late-22/early-23. The combination should take real yields higher, pressuring Tech multiples in the process. We’re big fans of the secular growth characteristics of Tech, but remain concerned about the potential for rotation and multiple compression.