Morning Notes — SPX Levels

Cyclical sector performance divergence (mostly semiconductors) in early August had us writing about the potential for a US-China trade détente and improving global growth 3-6 months forward. Official manufacturing PMI data for July had just been released and aggregate global manufacturing PMI had just reached a three-year low. In late August, the press was full of downbeat articles on trade and global growth, but other cyclical markets had begun to confirm the signal from earlier that month. September flash manufacturing PMI was the first data point to signal any uptick in global growth but more improvement followed and global manufacturing PMI now sits just barely in expansion territory at 50.1. Our expectation was for this number to rise above 51 sometime in late Q1 and eventually above 53 in the second half of the year. The investment implications of such an event favor International Equities, US Small Cap and US cyclical/value sectors. Many of those markets improved during Q4 as global manufacturing PMI data troughed but had yet to price-in above trend growth. China is the second largest global economy and coronavirus-linked economic weakness there will at least extend the timeline for above trend global growth and put those investment beneficiaries on the shelf. The rotation out of cyclically-sensitive assets began last Friday and has the potential to extend further until the number of new coronavirus cases begins to decelerate.