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Investing

The reopening trade could be coming back in vogue

Despite a stellar year for the broad market, stocks impacted by the Delta variant have had a tough go throughout the dog days of summer.


Our Top Market Takeaways for August 13, 2021.

Markets in perspective

Is the reopening trade finding a second wind?

 

If 2021 ended today, it would already be a notable year: The S&P 500 is up close to +20% year-to-date. Since 1980, the average annual return has been just over +10%.

It’s also been an eye-popping 196 trading days without a 5% pullback. That’s the longest stint since 2018—when the S&P hadn’t seen a 5% pullback for over 400 days.

Over that period, we’ve seen 58 new record highs, 47 of which have happened in 2021. That averages out to about 1.5 record highs per week. If you think that’s a lot, you’re right. The average year since 1990 has seen 19 new records.

 

And once the S&P 500 crosses 4,474 (just a 0.3% rally away from yesterday’s close), it will have already doubled from its Virus Crisis lows on March 23, 2020. Unless it takes another seven months to gain that last inch, this would mark the fastest bull market to have doubled from its depths—historically, it’s taken over four years.

Hesitant about investing at all-time highs? We aren’t. A look at the data suggests that getting invested at all-time highs has historically led to above average returns in the near-term.

Bottom line: It’s been a phenomenal year for the stock market, and we see the potential for further upside from here. But that doesn’t mean it has felt great, especially over the past few months. Bond yields fell meaningfully throughout the summer (the 10-year Treasury yield dropped as low as 1.17%) as risks such as the Delta variant, inflation fever and growth concerns pervaded investors’ psyches. Starting in July, we also saw a rotation from the reopening-oriented Value complex and into the more virus-resilient Growth complex.

Our call to add more growth exposure to portfolios is growing louder as the cycle progresses, but we’re not giving up on cyclicals—we still think investors should have a balanced exposure to both. In fact, developments over the past week suggest that the cyclical trade may be finding its footing again. Sectors such as financials (+2.6%), materials (+2.6%) and industrials (+1.7%) are leading the way this week with the S&P 500 up +0.6% through Thursday’s close. And year-to-date, cyclicals and growth have actually both garnered about a +18% return. As for Treasury yields? The 10-year has climbed +7 basis points higher this week and finished Thursday at 1.36%.

Here are things that unfolded this week that seemed to help boost reflationary sentiment:

  • The Delta variant is ugly, but vaccines—not lockdowns—are being promoted as the defense. As discussed in last week’s Top Market Takeaways, vaccines are helping to prevent the worst-case scenario (rapidly climbing hospitalizations and deaths) of the global COVID-19 resurgence. This week, the New York Stock Exchange announced it will require people to be vaccinated in order to be allowed on trading floors; Amtrak said its employees need vaccinations to be at work; and California will require the jab (or regular testing) for teachers. Right now, most restrictions put in place across developed nations don’t seem likely to hamper broad economic activity. We think the expansion can continue to power through the current wave.
  • The inflation fever broke. The Consumer Price Index (CPI) came in below expectations for July, slowing down to +0.3% month-over-month from last month’s +0.9% pace. Notably, used car prices finally chilled out, rising just +0.2% versus an average of +9% over the past three months. Concerns around burgeoning shelter inflation were quelled as both owners’ equivalent rent and actual rent prices printed lower than the prior month. Cue cheers from those in the “inflation is transitory” camp: We think this adds credibility to the Fed’s now-famous narrative, and removes some risk of early rate hikes that could prematurely slow the economy down.
  • The Senate sang “Kumbaya” and passed an infrastructure bill (the first half of this sentence is a joke, at least as far as we know). Democrats and Republicans passed a $1 trillion bipartisan physical infrastructure bill focused on roads, bridges, broadband and climate risk management. The bill still needs to pass in the House before becoming law, and Speaker Pelosi is making efforts to negotiate concurrent passage of a proposed $3.5 trillion social infrastructure bill. We’ll see how things shape up in the coming weeks (or perhaps months), but infrastructure spending looks more likely than not at this point. This bodes well for industrial economic activity and associated economic sectors.

The dog days of summer are winding down. Perhaps the dog days of the pro-cyclical trade are winding down, too.

 

All market and economic data as of August 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

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