Barometer Capital

Rotational Correction Looks to Have Ended – Secular Bull Market Resumes

Following five and a half months of consolidation, it appears that the next leg of a new reflationary secular bull market began its second leg in early October.

As many of our longtime clients know, Barometer believes in focusing on market-leading themes (our Disciplined Leadership Approach), sometimes avoiding large parts of the market and running portfolios that look quite unlike the indices. Our equity mandates tend not to look anything like the SPX, our income portfolios unlike the bond market and our balanced mandate are very different from a traditional 60/40- balanced mix. This will be increasingly important given the likelihood that we have moved from almost 40 years of a disinflationary cycle to one that is reflationary, where bonds and bond-like sectors (currently over-owned after years of outperformance) could underperform for a long time forward.

After the November 2020 breadth thrust (blast off), usually associated with the beginning of a new bull market and persistent gains, many of the market’s leadership themes began to consolidate in late April and early May. Corrections can come by way of time or in price (decline). This corrective period, (more time than price), continued through Q3 where it finally impacted the last bastion, the largest companies so important in the indices in late September. Investors’ various reasons for becoming more cautious were many, including supply chain dislocations, the Delta variant wave, China’s Evergrande troubles and uncertainty surrounding fiscal and monetary policies. More importantly, beginning late August and into September, the reflationary leadership groups gradually found a footing and have since re-accelerated in a meaningful way post-quarter-end.

As always, during corrective periods, Barometer focused on maintaining those positions that held up best and trimmed in areas showing the weakest relative strength versus the market, as well as those breaking long-term trends. While the tech sector was strong through July, after many quarters of leadership, high interest rates provided the catalyst for a pause while financials gained strength – a sign that the economic cycle was likely to persist despite investor pessimism. In addition, as energy supply remained constrained and demand picked up, rising crude prices provided strong performance for energy stocks. Barometer portfolios were adjusted accordingly, adding to energy, financials and reflation in general and reducing tech and bond like sectors.

Post-quarter-end in what is often a seasonally weak period, the pundit debate continues… Inflation, stagflation or reflation. As it stands, through our lenses, markets are sending a pretty healthy message. We would highlight that the groups that are strengthening vs. the various income and equity benchmarks are suggesting offence as opposed to defense. Cyclicals are winning versus secular growth and defensive sectors. Not what we would be seeing if the economic cycle was being derailed. As we often say, listen to the message of the market and make sure the portfolio lines up accordingly. We have likely begun the seasonal Q4 year-end rally as investors are beginning to look beyond more transitory challenges.

As we move through the quarter Barometer will monitor the various concerns as always, however, many are likely to be resolved over the next couple of quarters. Rising demand, ample liquidity and post-consolidation, more cautious investor positioning are proving to be a potent set of shock absorbers supporting a new reflationary cycle.

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