Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 continues to base out at highs (having done so since April 16th) with the catalyst being inflation uncertainty. Higher inflation is being driven, in our view, by an enormous demand vs. supply imbalance- resulting from the swift economic reopening and unprecedented levels of stimulus with supply chain shortages. This dynamic could last for months, but stimulus should ebb and supply chains should reopen over time. Productivity growth (due to economic digitization in the current environment) is also helping offset inflationary pressures, and margin estimates continue to climb higher. Importantly, the Fed is expected to remain accommodative (although will likely need to back down from its current ultra-accommodation). So while inflation concerns could be the catalyst for a moderation in the market's ascent, we view this as normal, particularly in year two of a bull market when the market's pace and volatility tend to normalize.
While the headline S&P 500 index has stalled out, the rotational market continues to play out beneath the surface (leaving plenty of opportunity for active investors). For example, WTI crude oil is breaking out to multi-year highs at >$68/bbl with OPEC maintaining its position on supply through July, along with increasing demand for a reopening world. This bodes well for the Energy sector, which we recently upgraded to an Overweight recommendation in our latest Sector Analysis (link here for in-depth analysis). Energy is breaking out to new highs today, and we would still be accumulating due to our expectation of further upside in the outlook. We also downgraded Technology to Equal Weight, and would use the recent bounce as an opportunity to lighten exposure (if overweight). The rotation from "stay-at-home" stocks toward "recovery" stocks continues to weigh on Technology despite strong fundamentals. We still like the sector longer term, but market momentum (and fundamental momentum) continues to shift toward shorter duration growth vs. longer duration with the likelihood of higher interest rates and an economic reopening underway.
Our current sector recommendations are slanted toward "re-open" areas, and we also continue to favor large Value over large Growth. Value holds more fundamental leverage to the robust economic recovery and is still relatively cheap in our view. Relative strength is approaching a break out, which we believe ultimately occurs. Additionally, the small caps are at a very interesting point, following a digestion (of historical strength) since March. The group is nearing a break out to new highs, which would reaffirm our bias to overweight with a 12- month outlook.
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