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Morning Notes — Value Sectors

SPX Levels

November 16, 2020

The market response to the MRNA data will be less violent than last Monday given elevated expectations, but value sectors should see, at least a few days of outperformance.  After a few days, investor attention will again be split between vaccination anticipation and what could be a deep-dark winter for infections and hospitalizations.  Some near-term consolidation is also expected given the magnitude of the move, but we expect the theme to re-emerge thereafter.  Investor skepticism is understandable given the short-term nature of recent (past ~3 years) value sector outperformance.   From an historical perspective, the strong outperformance of growth (Tech) vs value began in 2007 when a prolonged disinflation followed the global financial crises, China’s decision to reduce leverage ~2 years later, the trade wars ~10 years later and capped off by a global pandemic.  Massive global monetary stimulus was used to offset trade pressures and rising global manufacturing PMIs this time last year reflected growing expectations for a US-China phase-one trade agreement.  The value/growth ratio was rapidly narrowing until COVID-19 hit in January.  The pandemic-induced work-from-anywhere technology adoption this spring and summer probably front-loaded 2-3 quarters worth of growth that will take time to digest.  And the stage is now set for a similar period of value sector outperformance.

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