Still Need Cyclical Sector Leadership
February 18, 2020
SPX: We think cyclical sector outperformance is still required for the S&P 500 to sustain current levels. Defensive sectors lead today, but we see enough encouragement in other markets to stay constructive in the near-term.
Global growth: A few weeks ago, the daily rate of coronavirus infection was running at ~35%…it’s now running below ~5%. We hope this is one of our last coronavirus updates as the reduced rate suggests a peak sometime next month, which should coincide with a resumption in production to pre-outbreak levels. Meanwhile, China continues to provide stimulus to support the economy with small cuts in interest rates last week/yesterday, increased local bond issuance and an expected Loan Prime Rate (LPR) cut this Thursday. Collectively, these measures should be enough to stabilize growth to the ~6% level after a very sharp Q1 decline. Using high frequency daily indicators on energy consumption, traffic and air quality will give you a Q1 growth estimate near ~1%. But investors will probably still look through the valley if the damage is mostly confined to Q1. Our December forecast for global growth to run above trend in the second half of 2020 remains unchanged for now. As far back as September, we thought the realization would first impact markets sometime in late Q1 based on an inflection in global manufacturing PMIs. If Coronavirus-related production disruptions are mostly confined to Q1, the timeline should only be pushed out, rather than scrapped. And the beneficiaries of above trend global growth are still International Equity markets and cyclically-sensitive US sectors.