Bottom line:  There is a high likelihood that we are within 5-10bps for the low in 10-yr Treasury yields for now and the peak in the U.S. dollar, which should help propel the S&P 500 higher and provide tailwinds for my ongoing preferred positioning themes as stated below: 

  • My work remains medium-term bullish.
  • Buy the recent weakness in Financials and Value/Cyclical/Recovery/Reflation trades.
  • Sell relative strength in defensive areas — Utilities, Staples, and Health Care (except in HC equip and select single stock names).
  • Growth/FAANG remains as tilt above benchmark — have less exposure than pre-4Q20 but note they were never suggested to be abandoned — do not chase the recent tactical outperformance.

It has been my view that the relative weakness that has occurred in the Value/Cyclical/Recovery/Reflation trades that really began in earnest post the June FOMC meeting, which has been interpreted as a hawkish reversal by the Fed, should be bought. This is fully confirmed not only by my macro views, but also from my earnings revisions work.

I have stated several times over the last month that the market likely misinterpreted the June post-meeting comments and that it is my expectation that the central bank would eventually clear things up, but I was not sure how long they would wait. With the release of the Fed minutes, today was the first real opportunity to get more details around what really occurred during the recent FOMC meeting and if they did indeed turn hawkish.

Although I am not a day-to-day Fed watcher and try not to comment too much on pure policy too often, I have been commenting more around what I believe was a huge misunderstanding. One of the main underpinnings for my view is that it appears there is a vocal minority at the central bank that is hawkish and wants to be preemptive. However, Chairman Powell has made it quite clear that this is not the old paradigm and that the Fed is going to let things run hotter than the past and be more reactive, which happens to be the majority view and will be the ultimate policy that will be implemented.

Thus, today was an important event to possibly unwind the recent hawkishness viewpoint, and in my opinion, there was scant evidence that suggests that the Fed had made a conscious and definitive reversal towards accelerating the potential taper. Hence, it is my expectation that as we now look forward to the Chairman’s upcoming two-day mid-year Humphrey Hawkins testimony that Powell will go even further to walk back the perceived hawkishness and once again reiterate that a lot more needs to be done on the employment side before the FOMC will even consider beginning real discussions on the taper.

Therefore, I still hold the view that the 10-yr yield will end the year closer to 2% rather than 1%, that the USD (DXY basis) will weaken to 84-88 rather than rise to 96-100, and that Value/Cyclicals/Recovery/Reflation trades will once again be in the leadership while traditional defense lags — Staples, HC, Utilities, and legacy Telecom.

Importantly, this is completely backed up by my investment process that is heavily dependent on my proprietary earnings revisions work (ASM indicators). My analysis continues to strongly suggest that Growth/FAANG should beat traditional defensive areas and the overall market, but likely will lag Value/Cyclicals/Recovery/Reflation areas, which is why we have had Growth/FAANG above neutral all year.

Moreover, adding to my thoughts on the Fed, long rates, and the greenback, my research also is flashing that the upcoming earnings season, which begins during the back half of July will be strong, that the share buyback window will reopen during the last two weeks of July, and my expectation for the fading of COVID variants will lead to a constructive overall backdrop for equities.

Disclosures (show)

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