Same as it ever was
Investors shifted money out of the pandemic stocks; mega-cap tech and consumer staples stocks into economically sensitive stocks, including industrial, energy, discretionary, banks, and materials. Since the latter of these stocks are more widely represented in the DOW, that index was able to outperform the NASDAQ, which is heavily dominated by mega-cap tech stocks. That basically explains the market action from the last two weeks.
This week, which is significant because of the news about the Pfizer Covid vaccine, the S&P 500 and NASDAQ are lower while the DOW is higher. That's definitely a departure from the last 10 months.
Taking a deeper dive, Amazon was up about 3.8% while Honeywell was up about 16%. Now, I get it. I am cherry picking two individual stocks to make my point. But I can’t think of a stock that exemplifies work from home more than Amazon and I can’t think of a better representative of industrial stocks than Honeywell.
To be sure, none of those above returns in just the last two weeks could possibly give anyone something to complain about.
My whole point here is that the thing that explains the difference between the above percentage returns is sector rotation. That’s when investors take money out of one or more stock market sectors and add that money to different market sectors.
We've had quite a few head fakes over this sector rotation since the pandemic began, but this one, in my opinion, looks a lot stickier.
Expectations for more fiscal stimulus and effective Covid vaccines should keep this current bout of sector rotation alive; even dampen volatility due to the daily deluge of horrendous Covid news. That’s essentially the popular 2021 forecast for the stock market.
A few points to conclude with:
1. There is nothing abnormal about this. Sector rotation between growth stocks (companies whose earnings can grow during recessions) and economically sensitive stocks (whose earnings skyrocket during economic recoveries) has been around since the invention of stock markets.
2. The sector rotation into "work from home/stay at home" stocks and out of economically sensitive stocks has been going on since last February. The reversal we saw over the last two weeks has barely made a dent in reversing that. This is why I think this could go on for a lot longer.
3. I would avoid betting on only one group or the other. There are no guarantees that the Covid vaccines will work as well as we believe. Own both.
4. This current sector rotation will be like a pendulum. Nimble traders could make a ton of money.
5. Our lives are not going back to the way they were before the pandemic. We’ve been moving toward remote working and schooling for a long time. The pandemic just sped up the timeline.
6. Regardless of whether or not we are experiencing an economic revival, when money managers see their returns from the stocks favored by the pandemic shrink, they'll cut loose and dive into the newly emergent winners because they have benchmark anxiety. YOU don't, so make your investment decisions based on your own unique personal finance situation.
7. Investing hasn’t fundamentally changed. As much as we like to think that “our time” is special and unique, it’s the same as it ever was.
Enjoy: Talking Heads' "Once in a Lifetime," from the 1980 album Remain in Light "Same as ever was"
