Looking back two to three weeks ago, there was a real concern among investors that there was going to be a “Blue Wave”. To me a “Blue Wave” means that the Democrats would win the Presidency, the House of Representatives, and the Senate. In a scenario where the Democrats controlled everything, several things would happen. You would have the risk of Elizabeth Warren as Treasury Secretary which would have been very negative for financial institutions. You would have had a tremendous amount of regulatory activism, and you may have also had a multi-trillion dollar stimulus program that would have dramatically increased government borrowing and led to higher interest rates. Investors positioned themselves for a “Blue Wave”. The polling data showed them that the “Blue Wave” could happen. As a result, they sold off their bonds, perhaps even bought steepeners – derivative contracts designed to benefit from a steeper curve, and they invested in the financial services assuming that the curve would be steeper.

Then the election happened and there was no “Blue Wave”. We currently know that the Republicans have picked up seats in the House, and they appear to have kept control of the Senate. It is possible that if the Democrats win both seats in Georgia, the Senate will be a tie between the Democrats and the Republicans; however, it appears very probable that the Republicans will retain control of the Senate.

After the election results, we saw the so-called “Blue Wave” trade disappear, the curve flattened, investors moved away from financial services and they bought back the bonds they had sold, after realizing that without a multi-trillion dollar stimulus, interest rates were bound to remain low. Effectively a trade was put on then it was taken off. A week later we had the announcement regarding the President-elect and the announcement from Pfizer regarding the vaccine. There are some who think the vaccine effectively is like a stimulus in that it could improve final demand. It could also ignite animal spirits and we have seen people gravitate again towards cyclical businesses. Interest rates have risen, the curve has steepened again and financials did better.

There has been a lot of noise. Many investors went to one side of the boat. Then they went back to the other side. Now they’ve gone back to the side of the boat they were on two to three weeks ago. I see this largely as noise. The consistent performers through this time period and the consistent performers since the lows in late March were cyclicals. The stock market is trading like we are exiting recession. Cyclicals are beating defensives, small caps are beating large caps, industrial metals are beating precious metals. This is the way the stock market trades when you are exiting recession.

We have been taking advantage of the capital we preserved through investments in defensives, slowly rotating the money towards cyclicals. Almost everything we have bought during the last six months has been cyclical. That’s where we are focusing and are going to continue to focus as long as the economy is improving. Many of the purchases we have made are smaller companies than the companies we were selling to get liquidity, so we have been taking advantage of small versus large. More and more of the names contributing to our results are international. The US dollar has come off of high boil and our international names have been able to contribute to performance.

There is a primary narrative in the news that everyone is focused on. Beneath that are the opportunities to make money and that is where our focus will remain.

David L. Fingold, Vice President & Senior Portfolio Manager