The Battle for Leadership
As we enter a new decade, the established areas of market leaders such as technology and software are under threat from energy, financial and material stocks. These upstart sectors are under-owned, unloved, and cheap, while their technology peers are owned by everyone, command a religious following, and have a nose bleed valuations. When leadership changes occur, it’s important to have a strategy that can respond to these structural changes by moving toward new leadership and away from the old guard. If done correctly, that’s how a tactical strategy can generate outperformance through multiple market cycles.
In the short term, markets remain in flux as the battle between technology and commodities + banks rages on. Over the past month, we have reduced our technology weight to zero while moving to an overweight position in energy, financials, and materials. This means on days when technology performs well. We will likely underperform as technology is close to 40% of the S&P 500 while the combined weight of energy and materials is only 5%. Over the long term, if our broad macro call on commodities and banking is correct, the portfolios are positioned to generate outperformance if those changes play out at the stock level in each respective sector.
- The stock market is going through a massive leadership battle
- A new bear market is potentially forming for the U.S. dollar → positive for commodities
- Credit market correlation with the VIX breaking down → bullish for stocks
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