Wednesday's Market Minute: Rotation Is Fun, But It's Hard To Get The Speed Right

Almost exactly a month ago we pointed out on the Network that, despite climbing COVID curves in hot-spots and an uncertain future for fiscal support from the government, market technicals pointed toward a rotation into reopening trades. The relative strength of the Nasdaq next to the Russell 2000, and momentum to value, peaked that day, July 10. One month later, the battle between mega-cap quarantine winners and beaten-down reopening trades rages on. Compared to a month ago, the fundamental case for believing in such a rotation is actually stronger: apart from California, COVID cases and hospitalizations are dropping most everywhere. \

Economic data is fresh off a couple big beats, and high-frequency consumer activity that looked at risk of rolling over last month is stabilizing. Interim fiscal support has been provided by the White House. But it’s important to remember that this rotation is still mostly flirtation. A market that relies on economically-sensitive companies to lead means investors will be… sensitive to the economy. Bears will have their trigger finger at the ready on any disappointment in the recovery, with employment and virus counts driving market action again.

There’s also the opposite risk: that an unexpectedly fast recovery could create complications if Treasury volatility goes beyond expectations and hastens the bear case for frothy tech companies that are already under the microscope. Luckily, yields getting un-stuck near zero would be a stepping stone to any such scenario, and that would likely mean bringing the final piece of the rotation puzzle into place: banks.

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