Outside of technology and the FAANGs, US equity markets are pricing in a stalling of the
economic recovery. The ratio of cyclical to defensive sectors has been trending sideways since
the early June peak, as has the ratio of small-cap vs large-cap equities (top-left chart). This price
action is consistent with high-frequency indicators such as Google mobility data, which stalled
in June and July as the pace of re-opening slows in the US. Thus, US equities do not seem too
optimistic on the recovery, and the sideways move in the cyclical-defensive ratio reflects the
mixed economic data we are seeing at present.

US retail sales data was shockingly good last month, with the series now showing a V-shaped
recovery in level terms (top-right chart). Uncertainty over the surge in virus cases and the impact
on consumers makes this data seem even more of an outlier. Other weekly indicators, such as
the NY Fed’s WEI index (bottom-left chart) have continued to rise recently, but at a slower pace,
while railway-carload data (last chart) remains at very negative levels. The YoY change in railway
carloads tends to be a coincident indicator and is at such extremely low levels that it is hard to
see this indicator getting much worse. The market remains in wait-and-see mode, but we think
the balance of evidence shows the economy is recovering, albeit slowly. This will ultimately help
the cyclical sectors of the market, where expectations are still low.

Source: Bloomberg, Macrobond and Variant Perception