Morning Notes — Sectors

Value sectors have outperformed growth sectors so far in September.  The S&P 500 Value Index (SVX) has outperformed the S&P 500 Growth Index (SGX) by +6.7% month-to-date. This is primarily a function of improving US COVID statistics and the recent uptick in vaccine optimism.  Consensus still expects one of the three main vaccine candidates will have something encouraging to say by the end of October, but near-term value sector performance will probably depend on bank stress test results due at the end of this month.  Financials are the largest of the value sectors.  Banks announced significant reserve builds in Q1 and Q2, which now look overly conservative.  And if the Fed allows some banks to restart shareholder returns this month, the sector should attract very broad investor interest.

SPX: Expectations for a pre-election fiscal relief bill seem deservedly low, but the realization of a ‘nothing done’ at the end of next week could still weigh on equities.  Fairly strong technical support exists down to ~3220 and we expect that level will hold. Financial conditions (interest rates, money supply growth, bond yields and FX) are extremely supportive for equities, while cash remains at record levels, equity positioning is well-below average and equity sentiment is bearish despite the recent record high in the SPX.  A bearish scenario that includes no pre-election or immediate post-election fiscal support due to a contested election is interesting, but temporary.  And judging from November option term premiums, this scenario is at least, partially priced into markets already.