Historically, an increasing rate environment will cause the high-flying growth stocks to sell off and a rotation into the cyclically sensitive stocks will take place. Sound familiar? The 10-YR Treasury has nearly tripled since the summer of 2020. We are seeing a massive rotation into energy, banks, small caps, and because of COVID, travel and leisure stocks. Being a tactical manager allows us to frequently make changes in our models. This is to take advantage of opportunities or risk manage the portfolio. These are some of the times it pays to be a tactical manager for sure. Since the beginning of the year, we have been raising cash and repositioning those dollars into the reflation trade which we feel is here to stay. So, does that mean we are selling our tech titans? No! However, being diligent and always looking at the position size and the total portfolio allocation will protect you at times like this. You must ask yourself what kinds of assets will do well in this environment? Just recently, Appaloosa hedge fund manager David Tepper said in an interview, “the combination of stimulus and low Japanese bond yields are positive for U.S Stocks and that the selling of U.S Treasuries is likely over. This could be a setup for Japan to start buying treasuries which will stabilize the bond markets.” We agree with this assessment and are positioned accordingly.
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