Corporate Buybacks, Rising Rates, And Commodities

'Healthy Rotation'

So far in the recovery, we’ve seen a very healthy rotation, Adams noted. Notably, tech appears to have peaked relative to the S&P 500 in terms of performance back in September 2020.

Also, the market has moved toward a small-cap driven, broader performance, value-oriented recovery over the course of the last several months. Then small caps have only really started to take control since the November election, and this has been increasing since the beginning of 2021.

The market is broadening, Adams noted, where it had been highly concentrated in very defensive, high-quality strategies. Investors were hiding in investments they felt had the most defendable earnings stream in the S&P 500. Now, investors are starting to broaden their outlook and take on a degree of risk.

Rotation is also occurring in emerging markets relative to developed markets. Emerging markets are finally breaking out of the range they've been in since 2018.

“Generally, we’re seeing a broadening of performance in groups that were laggards in early 2020,” Adams said. “This has been a story for the last several months, and we think this will continue to be the story for much of 2021. As these groups play catch up, they tend to benefit more from economic reopening as opposed to economic shutdown. They benefit from a more risk-on, risk-tolerant investor base, as opposed to a risk-averse investor base.”

Sector Outlook

Action in the commodities space is consistent with reflation, Adams stated. Price increases in commodities are probably trading less on the expectation of inflation, and more on the idea that economies are returning to functionality.

Commodities are an immediate beneficiary of a cyclical recovery, Adams added, noting that Bloomberg's commodity index has surged over the course of the last several months. In fact, the index bottomed around the time stocks bottomed in spring 2020 and has recovered since. This further signals better performance and a risk-on attitude for equities. See Cyclically-Important Commodities Are Signaling Economic Boom, Says Nick Reece

The story is not so clear cut with the Energy sector however, she said. Energy relative to the S&P 500 may be in a bottoming process, and it certainly hasn't broken higher. We are still below January relative to the S&P 500 level for the energy sector.

Alternatively, Financials have a more positive outlook and benefit directly from an upward-sloping yield curve. This setup should see Financials outperform.

As a result, Financials may be a stronger driver than Commodities for an earnings recovery in the S&P 500. Overall, Adams favors cyclical plays over defensive plays, and we need to see much better earnings revision momentum emerge for groups like Energy, Materials, and Industrials, for that long-only leg of value to perform better.

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