We are trimming our Mega-Cap exposure a bit further and adding to Financials, Industrials and Emerging Markets. This trade is similar to the one from last week and reflects my increasing near-term optimism. The very large stocks have held in better than the broad market quite substantially. So far in Q3, the largest stocks have outperformed the S&P 500 by about 2.5%. On the other hand, with the fears of global growth slowing and the financial system coming under stress, Industrials and Financials have underperformed by 6% and 7.5% respectively, while Emerging Markets have lagged by over 4%.
While the longer-term outlook remains challenging, the near-term prospects for a meaningful rally justify these trades. After implementation, we continue to have a barbell against the S&P 500 with Small-Cap and Mega-Cap as well as some tilt towards Financials, Industrials and Emerging Markets.
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