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Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

The market remains resilient with the S&P 500 inching closer to new all-time highs (less than 1% away) despite no major improvements in the stalemate on the coronavirus relief package. The focus of this week has been on the rotation we have seen into more beaten, lagging sectors such as Industrials, Financials and Energy that were all up over 3% in the last week and into small-caps, while areas of leadership (Technology and Communication Services), have seen momentum wane. Even yesterday, when the NASDAQ was up over 2%, the internal technical strength was uninspiring with advancing volume as a percentage of total volume at only 56%. While we find the recent outperformance by the more cyclical sectors as positive, we believe in order for a long-lasting, sustainable rally, market breadth needs to be widespread with all sectors moving higher, and not a continuation of the recent rotation we have been seeing under the surface.

Clearly, the next area of resistance is going to be breaking through the all-time high resistance level. It is important not to get complacent, thus during periods of market rotation, we would use the pullbacks in areas such as Technology, Health Care, and Communication Services to accumulate positions.

Overall, the narrative has been that the market rally (from the March lows) has been rather narrow with large, cap Tech driving the majority of gains with short-lived bouts of outperformance from cyclical areas only for Tech + names to quickly regain is leadership position. However, this dynamic could see a shift if the yield curve is able to see a sustained period of steepening, similar to what we have seen over the last week, which would suggest that the bond market may finally be anticipating an improvement in the economic outlook following the 3rd consecutive sequential improvement in non-farm payrolls. While the technicals remain under pressure (suggesting that we would continue to fade these short-lived rallies), a sustained steepening of the yield curve could present opportunities to embrace the “catch-up” trade on the deeply beat-up, cyclical sectors such as Industrials and Financials.

With Q2 earnings season winding down (with over 91% of companies already have reported earnings), it has been a much better than expected earnings season. Overall, 84% of companies have reported earnings better than expected with aggregate earnings surprise of ~22%. Looking ahead to Q3, earnings expectations have been rather resilient, with an expected y/y decline of 23.1%, which is an improvement from -24.8% in mid-July when earnings season began. Moreover, we have seen 2021 estimates move slightly higher as the economy continues to reopen.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

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