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Morning Notes — Stealth Rotation

Stealth Rotation

November 3, 2020

Stealth rotation: Better-than-expected Q3 reports from Tech companies mostly see a sell-the-news reaction as investors slowly shift away from growth/momentum toward cyclical/value sectors. The broad Tech rally from the spring and summer effectively ended when CIEN issued poor guidance on September 3.  A Democrat-sweep scenario could accelerate the stealth rotation for a month or more, while a Trump win would likely result in an apologetic return to the names that exceeded expectations most.  Speaking of stealth, JPM announced a small increase in expected 2021 Net Interest Income guidance, which is helping Financials (our favorite value sector) a bit more than we’d expect given today’s move in bond yields.  This is the first boost in bank NII that we’ve seen in over two quarters and will help sentiment for the group.

De-risking: A Trump sweep in Southern states plus Pennsylvania would de-risk a contested election scenario.  A Biden win to withstand litigation would probably take a combination of GA, NC, FL and Midwestern states, including OH.  Completely de-risking a contested election scenario would likely lead to a test of the S&P 500 record high close of ~3581.  A known election outcome combined with incremental progress on both stimulus and vaccines would also help value sectors outperform.  

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