If every vaccinated consumer acts like my 82-year-old father, the economic rebound could surprise to the upside. He has canceled streaming services that helped drive the “stay at home” trade and hit the road to travel. Should he be driving? Should he be stopping at every barbecue joint that crosses his path? That’s a different conversation. The point is that we are in the middle of a “catch-up” trade that we think will continue.
The shift in equity leadership toward last year’s laggards, which we have been highlighting for several months, has been given a further boost by the passage of the USD 1.9 trillion fiscal stimulus package in the US. Sectors like energy and financials have rallied significantly. Rising bond yields have contributed to the strong performance of value stocks relative to growth and technology stocks.
This “reversion trade” means that most of the dominant short-term trends in markets are the opposite of the long-term trends that have persisted for a decade. Investors are left asking: How much further does reversion have to run? And are the long-term trends still intact? We consider these two questions in this letter.
With inflation, stimulus, and an accelerating economy all influencing markets in the second quarter, we think investors should still be positioned tactically for a continuation of the “reflation trade,” particularly in energy, financials, and small caps. All of these sectors should benefit from a more robust economy, and higher yields. This environment is likely to continue to create near-term volatility and uncertainty for some growth stocks, but should not change their structural earnings growth potential, which is the key driver for long-term returns. As such, longer-term investors should consider how to use a period of potentially elevated volatility to build up strategic positions in select growth themes.
For more details on how to position for today’s market environment, refer to our 2Q outlook report, “Positioning for a post-pandemic world: Our outlook for 2Q.”