Morning Notes — Technical Resistance Ahead

Shift: The narrative on vaccines has shifted from ‘if’ to ‘when’, which has also shifted the predominant investment theme from ‘COVID winners’ to ‘recovery outperformers.’  You can see this in the price action of airlines, casinos, cruise lines and hotels over the past 5-7 sessions. You can also see it in the relative outperformance from value sectors.  During a recovery, you generally try to: 1) overweight value; 2) stay neutral on growth; 3) underweight quality; 4) neutral on momentum and; 5) prefer higher volatility to lower volatility stocks.  Banks, where Q2 results are likely to be the trough, are seen as a beneficiary of a recovery because the yield curve should steepen (bank Net Interest Margins rise) and the next round of Fed stress test should result in looser restrictions on shareholder return. 

More: The ‘value rally’ started to take shape over the past month as we noted decelerating COVID-related hospitalization trends in US hotspots.  We’ve seen two other short-lived value rallies since the March 23 low that followed decelerating infection trends in the Northeast and then Midwest/mid-Atlantic regions.  But a value rally could last longer this time given improvements in the economy, the backlog of monetary stimulus and the ‘still-high’ likelihood of more fiscal stimulus. Global manufacturing and services PMIs are now in expansion territory and a vaccine approval will only accelerate the trend. Since late March, we’ve consistently advocated an allocation to cyclical/value positions with sustainable dividend yields as a partial substitute for sub-1% bond yields.