Morning Notes — Today’s Downtick

Today: In the short-run, markets are influenced by fundamentals, sentiment and positioning.  In the long-run, markets are only interested in fundamentals and we generally use the other two inputs as contrarian indicators at extremes.  The current fundamental narrative is undeniably positive for equities, but elevated bullish equity sentiment and positioning indicators argue for some near-term caution when adding positions.  Thus far, Q4 earnings for S&P 500 companies are running well ahead of expectations with ~85% beating consensus vs. the 5-year average beat rate of 74%.  The lackluster price reaction to date is due to positioning, valuation concerns and a downshift in fiscal stimulus expectations.  And today’s reaction specifically is due to an erosion of market confidence related to the coordinated, retail-investor short squeeze.   

Tomorrow: The US and global economic recovery ended in September and is now clearly in the expansion stage of a normal, but fast cycle.  And at this part of the cycle, investors are naturally asking ‘what happens next?’  As you’d expect, the expansion stage of any cycle disproportionately benefits the most cyclically-sensitive stocks and value sectors.  In fact, there’s never been a time in history when value hasn’t aggressively outperformed growth during an expansion phase.  This hasn’t happened yet as the relative performance gap between secular growth and value remains wide by historical standards.  After 12 years of relative underperformance, value sectors like Financials, Materials and Energy only account for a combined ~15.3% of S&P 500 market cap, while growth (just Tech and Consumer Discretionary) account for more than 40%.  This makes it possible for a period of value outperformance to result in a lower level for the S&P 500.