The S&P 500 was down on the week. It closed at 3,906.71 last Friday and closed at 3,841.94 today. If you’re reading this today and haven’t paid much attention to markets throughout the week those numbers seem like it was a tame week. However, we can officially say that this week was a humdinger. The bond and equity market experienced considerable volatility. The stalwart Growth/FAANG names actually led the downside for a change. My colleague Tom Lee will discuss the significance of this. If you remember, for most of the year when markets have been down the big Growth names that largely act as bond proxies when rates are ultra-low were a safe-haven.

Volatility Reigns All Week, But Friday Ends Strong

You might have missed that this morning’s jobs report was actually a smash outperformance to the upside. In the first Jobs Report of the Biden Administration the economy added an impressive 379,000 jobs in February. This was leaps and bounds more than the 49,000 added last month and more than double than the 175,000 that economists predicted. Does that sound like something the happens right before a market crash?

Markets are entering a confusing transitory period where strategies that have worked for a decade or more, in terms of generating alpha, will likely begin to change. The American consumer have significantly more savings than they have had at any point in recent history. They have cabin-fever, they have a strong fundamental desire to reconnect and re-engage with parts of the economy that have been suspended for the last year.

One of the confusing things about this period is that the force of the pandemic on markets in the economy was so significant that it broke the normal economic cycle. We’re about to enter the great reset, both in terms of corporate operating leverage for many of our favorite stocks and sectors are set to dramatically outperform as their new lean businesses meet pent-up demand and flush consumers.

So, the economic re-opening is happening outside the normal business cycle. The massive cost-reset and re-orientation of businesses to meet pent-up demand mean the Cyclical companies are the new ‘growth stocks.’ While the economy during the pandemic was defined by historical overspending in digital areas and on goods, we see a massive reversal coming where pent-up demand will unleash a torrent of demand that pushes earnings and growth rates higher than the rest of the economy for many neglected and embattled sectors and industries.

Volatility Reigns All Week, But Friday Ends Strong

Similar to the post-war economic recoveries of the nations who had to engage in massive rebuilding in the wake of war, the need to rebuild and reconnect will push consumption to be concentrated in ‘Epicenter.’ This is why we think that the main story, being partially hidden by volatility among Growth/Defensives, is that Cyclical stocks are taking leadership in the market in dramatic fashion. The business cycle is not in its typical sequence. This is evidenced by the fact that Financials and Energy, which typically lead returns at different stages of the business cycle are now leading returns together YTD in 2021. We think that in the coming economic recovery, sectoral leadership will not follow the typical sequence. What does this mean? In summary, we think investors should look at the message from markets, rather than try to force their view on the market.

The equity markets are showing a very different leadership in 2021 and we think that this phenomenon will endure. The bottom line is that we are, and think you should, still be buying ‘Epicenter’ stocks. They are about a third of stocks and we think you should be overweight. The amazing thing is that the institutional rush we foresee into the ‘Epicenter sectors has scarcely begun, particularly in the Energy Sector. It is the most popular underweight behind only cash and bonds despite its exceptional performance so far. The rush by institutions chasing returns that we think will occur into this and other ‘Epicenter’ sectors means there is a lot of upside is left.

We want our subscribers to keep in mind that a very different frame of mind is ahead of us than that which was behind us. We have posed a few questions to make our point. When theme parks are filled with flush consumers who have cabin fever do you want to buy more Netflix? Probably not. Do you think consumers would rather sit on a Peloton at home or commune in reopening gyms? Everyone is going to be going on vacation and re-acquainting themselves with the experiential economy, thus we’d rather own a cyclical name than Zoom. So, you can see, there will be a shift in the minds and wallets of consumers.

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