Now we have another shot on goal as Moderna (MRNA) says that their COVID-19 vaccine has a 94.5% efficacy rate. While cases are rising around the globe and people are gearing up for their holidays to look a bit different this year, investors are looking forward to a world with a vaccine. It appears that that is a world where growth prospects are brighter than they have been over the past two plus years. This has led to a massive rotation under the surface of the market, though our readers have been preparing for this as we have slowly become more bullish on certain cyclical / value areas beginning with Materials in June / July and Industrials in August. More recently in these pages, we have had favorable things to say about the Financials, in particular banks. Our Copper to Gold Ratio chart paints a picture of a better economic growth environment. One that should set the stage for broader participation to the upside beyond the FAN-MAG types of stocks.
However, the shifts are more than just from growth to value. There is also a shift from large to small…from the companies that had the scale and the resources to survive and thrive in a slowing economy to the ones that are more attached to the cyclical ebb and flow of the global economy. The biggest event to play out last week, from a market perspective, was the breakout in small caps. The iShares Russell 2000 ETF (IWM) closed last week above its 2018 highs for the first time. This begs the question, are we closer to the beginning of a cyclical bull market or the end? What does it mean for equities as an asset class when the small caps trade to new record highs? That’s probably not bearish. The fact that they are also now outperforming is also a bullish development.
The shifts don’t stop there, however. In what is potentially an even bigger theme than the large to small or growth to value shifts, investors may be well served in being open to the idea that the next big shift could be from the United States to the rest of the world.
The iShares MSCI ACWI Ex-US Index Fund (ACWX) has broken the downtrend from the 2018 highs and is now outperforming the SPY. The fund has a Bullish ETF Rating and Bullish Money Flow. It is overbought in the near-term but odds favor a move back to the 2018 highs and possibly beyond.
We are likely closer to the beginning of a cyclical bull market than the end. The question is who will lead?
*This is a excerpt from the weekly note that PortfolioWise users receive every Tuesday*