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Morning Notes — Value Outperformance

Value Outperformance

August 24, 2020

Rotation? Value is outperforming growth today in reaction to the FDA emergency use treatment authorization and reports suggesting possible fast track vaccine status for the Oxford/AZN candidate. Growth sectors are still higher on the day, but value sectors (Materials, Financials and Energy) are clearly leading, which is generally considered a healthy internal condition for the broad market.  The value sectors just happen to be cyclical this time around (other cyclical sectors include Industrials and Consumer Discretionary) and a bull market led by cyclical sectors is considered more sustainable than one led by defensive sectors (Staples) and bond proxies (Utilities).  Recall our cautionary messages from mid-late January were based on defensive sector leadership and decelerating price trend momentum…that’s not the case today.  The ‘work from anywhere’ beneficiaries are lower as a reflex reaction to the treatment/vaccine headlines.  This needs to be watched as prior episodes of weakness in ‘work from anywhere’ only lasted for ~2-3 days.  We expect value sector outperformance well into September, but remain skeptical this will cause broad rotation out of growth/Tech. 

Sloppy: Tech has vastly outperformed the broad market during the retracement, which has raised concerns about profit taking once mobility trends return to more normal conditions.  It’s a rational concern, but comparing current conditions/valuations to the 2000 dot com bubble is irrational.  In contrast to 2000, the S&P 500 Tech sector currently has strong balance sheets, strong FCF generation and very strong earnings.  Note, the S&P 500 Tech sector delivered positive earnings growth in Q2.    

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