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What worked this week: A reflation trade without inflation

Nov. 14, 2020 6:00 PM ETXLE, XLF, XLI, XLK, XLY, XLCBy: Kim Khan, SA News Editor20 Comments

The stock market finished the week just as it started. The cyclicals outperformed the growth sectors. The recovery stocks jumped. The stay-at-home plays fell.

The news of the efficacy of Pfizer’s vaccine had cash pouring into value stocks which had lagged the summer rally. Many said the long-awaited rotation trade had finally arrived.

For just one week that’s hard to argue with, given the S&P sector performance. 

In the lead, the SPDR S&P Energy Sector ETF (NYSEARCA:XLE) rose 17.1%, but there’s some caveat about that outsize gain. It’s been the most beaten-down sector during the pandemic and is the only one that is still lower in the last six months, off 5.2%. All other sectors are up at least 13%.

The SPDR S&P Financial Sector ETF (NYSEARCA:XLF) is up 8.3% and the SPDR S&P Industrial Sector ETF (NYSEARCA:XLI) is up 5.4%.

The homes of the megacaps stocks that were the standard bearers of the summer rally, brought up the rear for the week.

The SDPR Information Technology Sector ETF (NYSEARCA:XLK), home of Apple and Microsoft, was the only sector to lose ground, off 0.3%. 

The SPDR Consumer Discretionary Sector ETF (NYSEARCA:XLY) rose just 0.5%. Its relatively poor performance was the result of the weighting of the stocks in the Consumer Discretionary sector. Amazon, a stay-at-home stock, accounts for about 23% of the sector. In contrast, many of the consumer discretionary recovery plays rose, with the top-ten gainers all up more than 10%.

The SPDR Communications Services Sector ETF (NYSEARCA:XLC), home of Alphabet and Facebook, rose 0.6%.

But the stock market doesn’t tell the entire picture when it comes to a reflation trade that helps the value stocks.

A look at the Treasury market shows much more trepidation about whether any new trade is gaining steam. 

The 10-year Treasury yield came into the week at about 0.81%, the midrange it had been for November and around the 200-day moving average.

It rocketed up to 0.96% on the vaccine news on Monday.

After easing back, it rallied again Tuesday to 0.98% and tested the important 1% level that could lead the Federal Reserve to intervene to flatten the curve with QE.

But after the Veterans Day holiday for the bond market, the yield tumbled back down to 0.86% and ended the week just below 0.9%. 

There’s also the question of how there can be a reflation trade with no inflation. 

The core CPI was unchanged for October, falling for the fourth-straight month after it peaked at 0.74% in June. 

Price gains in airline fares, recreation, and new vehicles were countered by drops in motor vehicle insurance, apparel and household furnishings and operations.

The core PPI for October rose just 0.1%.

Under the Radar

Disney rallied after its quarterly report as Disney+ success overshadowed the theme park and movie business losses due to COVID. 

Those skeptical of Disney+ as the new company direction should consider that it has added 1/3 the number of Netflix subscribers in just eight months. For the bull case on Disney, see The Walt Disney Company Proves It's Best Of Breed.

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