Morning Notes — Sectors and Catalysts

The Nasdaq 100 (NDX) pushed to record highs on lower bond yields.  The index pulled back with the SPX on rising Delta variant concerns, but the NDX has been and should be a beneficiary of lower bond yields, specifically lower real yields (nominal yields – inflation expectations).  Real yields are far more correlated with sector performance than nominal yields.  Signs that real yields were basing back in mid-September were our inspiration to shift positioning in favor of cyclical/value sectors. Our long-term preference is to own secular growth stocks, but macro fundamentals still support early cycle dynamics that lead to cyclical/value equity outperformance.  Ten-year real yields are now lifting from the lower end of their 12-month trading range. A second rotation out of growth and into cyclical/value sectors would follow higher real yields.  

Catalysts: The near-term recipe for higher real yields would include: 1) reduced concerns around the Delta variant; 2) inline-to-better July flash PMIs (this Friday); 3) cooler inflation data (June PCE due Friday 7/1) and; 4) improving labor market data (July Jobs Report due Friday 8/6).  The Fed also gets a chance to rebuild some lost credibility when it meets next Wednesday.