Exposure rates of the Dorval Asset Management Range – 7th January 2022

Investors are already looking to a world of the future when the Omicron wave will ease in western countries, paving the way for a reacceleration in an already robust economy. US job figures reflect this momentum, which is driving rotation into more cyclical themes to the detriment of defensive stocks as well as bonds.

While US companies’ pace of job creation remained moderate in December (+211K in the private sector vs. +270K in November), the unemployment rate fell below 4% for the first time since February 2020 and hourly wages have continued to rise at a pace of close to 5% per year over the past several months (cf. chart 1). The US economy remains dynamic, and the modest job creation rate seems to be due to a lack of available labor first and foremost. This labor shortage can be partly explained – some staff taking early retirement during the Covid pandemic, reallocation between sectors, childcare due to school closures, etc. – and is partly unsolved. Some US analysts talk about a “Great Resignation”, or a sort of restlessness due to the Covid crisis, although that remains to be proven.


Unemployment rate and hourly wage increase in US

Unemployment rate
Increase in hourly wages in private sector (yoy)


This tension on the labor market resonates with the Fed’s shift in tone, with some members now even talking about pruning the Fed’s balance sheet, in addition to the now near-scheduled hike in short-term rates. Treasury bonds logically continued to rise and stand at more than 1.75% for the 10-year (cf. chart 2). However, we note that the recent gain in yields primarily involves the short end of the curve, while yields remain surprising low on the long end. Even if the 10-year rate were to rise to 2% or slightly higher – which would seem logical – this would not mark a radical change.



Rise in bond yields, but particularly on the short end
US Treasury bonds

10-year rate / 2-year rate


The surge in bond yields could admittedly continue to fuel volatility, but it does not look like a major source of disruption at this stage. However, it does go alongside a major rotation trend on the equity markets, with investors moving into cyclical stocks and out of defensive stocks (cf. chart 3) as well as large growth stocks. Renewed economic optimism promotes themes of a widespread propagation of earnings growth, while conversely dragging down stocks that are more exposed to interest rates which had benefited from the Delta and Omicron waves.


Strong outperformance from cyclical stocks at the start of the year
Equally weighted baskets of European cyclical and defensive stocks (source Goldman Sachs)

Cyclicals / Defensives / Cyclicals – defensives


So the year is getting off to a very eventful start on the stock-market. Our portfolios are already fairly overweighted towards cyclical stocks, so we have not made any major changes to our approach over these past few days. We wish all our clients and partners a very happy and healthy new year!



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