The S&P 500 finished at a record high to close out a mostly quiet week. As we move into late summer, the market appears to be settling into a slow and steady pace. The gains have not been sharp in recent weeks, but they have been consistent. We expect the backdrop of low rates, a Fed ready and waiting, hopes for a second stimulus, and the unexpected strength of a surprisingly large group of companies has been enough to keep the rally in motion. On the other hand, it is believed that the concerns about valuation, the pace of the recovery, virus trends, and the approaching election have slowed the advance. Though we are technically at a new high, the battle for a definitive breakout is likely not over.
Over the last month or so, cyclical companies have been trying to catch up to their more defensive counterparts. In this market, defensive has taken on a new meaning. Defensive names in a pandemic are those we would consider leveraged to technology, communications, and the stay-at-home economy. Today's cyclical companies are what we call "boots on the ground." These are companies leveraged to raw materials, industrial production, highly discretionary purchases, and financiers. Better performance out of this group comes with improving levels of economic activity and rising inflation expectations. Their participation is crucial for the rally to continue. Valuations are attractive in many of these companies and can offer a compelling opportunity for those still on the sidelines. We have gotten a taste of this in recent weeks, but is it sustainable?
We are at a critical moment with schools trying to reopen. Virus trends have improved over recent weeks, and the death rate is expected to move lower by the end of the month. We are now waiting to see whether schools disrupt this progress. If not, we expect there is good reason to believe that cyclicals have a lot of room to run. We have tilted a bit more cyclical, and we've got our eyes on some of our favorite names.
Preston May, CBE®
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