Well, as noted, the rotations that have characterized the last three weeks’ price action continued apace on Monday, especially in small-caps which again led the way.
Yields and the dollar were choppy, but there were no discernible signs that the mood has materially changed since last month, when “hope” around tax cuts and the prospect of a more hawkish Fed fueled a bond selloff and led the greenback to its first “green” month since February.
In a way, you might say the rotation and/or the revival of the Trump trade as clouded the outlook even as it represents a more upbeat assessment regarding the viability of the U.S. reflation narrative. There’s no clear direction headed into the home stretch for 2017. What everyone had come to begrudgingly accept (the death of the “Trump trade”) is now no longer a foregone conclusion. “September saw a reversal in many of 2017’s established trends. Were they just corrections or were they genuine trend turning points?,” Bloomberg’s Mark Cudmore asked early on Monday morning, adding that “the evidence isn’t conclusive and it’s hard to have conviction in the direction of any of the fundamental drivers”
And although no one seems too concerned about this, we’d be remiss not to mention that any further move up in yields risks destabilizing risk assets (and especially stocks) if it happens too quickly.
This, generally speaking, is the subject of the intro to Goldman’s weekly GOAL Kickstart note, excerpts from which you can find below…
The past few weeks have been marked by significant rotations: Treasury yields have increased, low vol stocks have underperformed, the dollar has rallied, financials have outperformed staples and value has outperformed growth (Ex. 1).
Gold has sold off materially as these rotations have been accompanied by a significant increase in risk appetite.
Across asset classes, our measures show the pickup in risk appetite has been particularly strong in equities, as evidenced by strong performance in the cyclicals vs. defensives trade across regions and other similar rotations. That rotation has been a factor in the recent market rally is also evident because not all sectors have gained — while the market was up (MSCI World +2%), consumer staples sold off (-2%), for example.
Into year-end we think that rates volatility might stay elevated. Against that we are less concerned about growth disappointments weighing on markets right now. From here we see the need to be more selective on rotation. As our US equity strategists have highlighted, macro variables should remain supportive for financials outperforming staples as our rates strategists forecast higher interest rates by year-end, with Fed balance sheet reduction contributing to steeper curves in non-US economies. Improvements in fiscal and tax expectations should also be supportive of higher inflation and yields. But we do not expect value to outperform growth broadly given our commodities team believes the recent rally in oil is unlikely to persist.