Two big things you need to know: First, the Energy sector still looks attractive to us, even after its big move in March, and we remain overweight. Second, Trump has lost some momentum in swing state polling, challenging a key assumption of many non-US investors.
If you’d like to hear more, here’s another two minutes. Now, let’s jump into the details.
Starting with Takeaway #1: Energy Still Has Room To Run
and Russell:
Despite the big move so far, valuations still look attractive to us with both Large Cap….
…and Small Cap on our models. Overall, the sector continues to look interesting to us and we remain overweight within the S&P 500.
In addition to attractive valuations, heightened geopolitical risks (which our colleague Helima Croft has written about extensively over the past week) remain supportive of the sector from a generalist perspective.
Ongoing skepticism over the Fed’s ability to cut rates later this year and growing acceptance of the idea that the economy is actually quite strong are also tailwinds for the sector. As we’ve discussed previously, Energy shows the greatest tendency to outperform when interest rates are rising within the S&P 500…
…and Value (which Energy is a key component of) tends to outperform Growth when GDP is trending above average.
Flows are also still constructive for Energy funds as well, as has been the case for cyclical and commodity sectors generally of late.
Moving on Takeaway #2: Trump Has Lost Some Momentum In Swing State Polling, Challenging A Key Assumption Of Many Non-US Equity Investors
Using data from RealClearPolitics.com, we’ve been tracking trends in the polls for eight swing states. While Trump has maintained a strong and sizable lead in the Ohio polls, he has slipped relative to Biden in most of the others to some degree.
Biden is also showing some stabilization in his overall approval and favorability ratings….
…and has moved up in the national polls and betting markets as well. We think this shift in momentum in the race for the White House is important for US equity investors to monitor as it challenges a key assumption of many non-US equity investors that Republicans will win the Presidency and both chambers of Congress.
As we’ve discussed the election with investors, we’ve been keeping an eye out for whether any particular parts of the equity market are becoming more aligned with the momentum behind either candidate. As we’ve been digging into this issue, we’ve found that there’s been a fairly strong correlation between the Trump-Biden spread in the betting markets and the performance of US equities relative to European equities. Generally, When Trump’s been gaining on Biden, the US has outperformed. Recently, as Biden has started to close the gap with Trump, US equities have started to move sideways relative to Europe, giving up the strong leadership that was previously in place. We’ll be keeping a close eye on this chart to see if investors are starting to treat the US as a Trump trade and Biden as a Europe trade.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
