Markets in Focus

Timely analysis of market moves and sectors of opportunity

September 27, 2021: Pay attention to possible rotation from growth to cyclicals

The last few weeks provide an excellent example of why investors should look at long-term trends instead of stressing over the day’s headlines, said Matt Orton, CFA, Director and Portfolio Specialist at Carillon Tower Advisers. “Debate continues over COVID-19 vaccines, various infrastructure packages, the debt ceiling, and through it all the S&P 500 is nearly unchanged,” Orton said.

Beneath the surface, there have been some more notable developments. The S&P 500 experienced a 4% drawdown, which led to the first oversold condition in nearly 400 days. The Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, spiked to its highest level since May. But just as the bears started to get excited, the long-term trend held and markets bounced higher. The key question now is whether the market will continue to push higher or if it’s still vulnerable to more downside.

The S&P 500 went 380 days since its last “oversold” condition (based on the 14-day Relative Strength Index). “This alone is quite impressive — it was the second longest streak since 1950,” Orton said. “In addition to this historical context, it’s worth noting that credit markets held up well over the past few weeks, giving me confidence that there’s nothing more pernicious we need to worry about.” It also looks like rates will continue to move higher, which would be supportive of small caps and cyclical sectors, both of which would be supportive of improved market breadth.

Respect the upward trend:
S&P 500 quickly reversed oversold conditions

S&P 500 quickly reversed oversold conditions

Source: Bloomberg, as of 9/24/2021.


In addition to getting support from higher yields, the more cyclical parts of the market should benefit as virus-induced economic slowdowns ease. Airfare spending has started to increase after meaningfully slowing down due to the surge in cases of the delta variant. Separately, spending on restaurants and brick-and-mortar retail actually held up well in the face of rising cases. And while the expiration of federal unemployment benefits impacted spending for low income households, it wasn’t enough to impact aggregate spending, which actually improved from August levels. Overall, the economy and the consumer are on solid footing going forward.

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Debate continues over COVID-19 vaccines, various infrastructure packages, the debt ceiling, and through it all the S&P 500 is nearly unchanged

“With the worst of the COVID-19 pandemic hopefully behind us, I think the setup looks attractive for small caps and cyclicals,” Orton said. “This is especially true as we head into earnings season where expectations are incredibly high for the growthier parts of the market and have room to improve elsewhere.”

Rising yields may support small caps, cyclical stocks

Ten-year yields have been building a base for the past few months and seem to have broken out above a key resistance level. If they can hold above 1.38 to 1.40%, Orton expects upward momentum to continue, especially given the more hawkish tone from the U.S. Federal Reserve (Fed). This would be supportive for small caps and cyclicals, both of which have underperformed since March.

Yields appear to be breaking out

Yields appear to be breaking out

Source: Bloomberg, as of 9/24/2021.


Cyclicals may be poised to outperform

Yields appear to be breaking out

Source: Bloomberg, as of 9/24/2021.


A strong earnings season could also be a tailwind for smaller and cyclical stocks since expectations are very high for the larger growth companies. “I would keep my eye out for a rotation from growth toward cyclicals perhaps in October,” Orton said. He also points to market conditions as supportive of active investment managers who can benefit as dispersion increases and market breadth widens.

“When cyclicality starts to broadly outperform, that is when active management matters,” Orton said.

this week's data releases:

Monday U.S. durable goods, U.S. Federal Reserve (Fed) governors Evans, Williams, and Brainard speak
Tuesday Fed Chair Jerome Powell and Treasury Secretary Janet Yellen testify before the Senate Banking Committee, Fed governors Bostic and Bullard speak
Wednesday Energy Information Administration (EIA) crude inventories, Eurozone economic/consumer confidence, and U.S. pending home sales
Thursday Fed governors Williams, Bullard and Evans speak, Powell and Yellen testify before the House Financial Services Committee, and U.S. initial jobless claims
Friday Fed governors Harker and Mester speak, University of Michigan sentiment report, Institute of Supply Management (ISM) manufacturing, Eurozone CPI data, U.S., U.K., France, Germany and Eurozone manufacturing Purchasing Manager Indexes (PMI)

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The daily moving average (DMA) is a calculation that takes the arithmetic mean of a given set of prices over the specific number of days in the past; for example, over the previous 15, 30, 100, or 200 days.

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