Big Rotation in Stocks May Be Coming

August was certainly a stunning month for the stock market.

Both the S&P 500 and Dow posted their best August gains in decades. In August, the S&P 500 climbed 7% higher, while the Dow rallied 7.6%. The NASDAQ also soared an impressive 9.6%. And, according to Barrons, those gains firmly place August 2020 in the top 6% to 7% in terms of monthly gains for all three of the major indices.[1]

But the rising tide hasn’t lifted all boats. Since March, it’s been a tale of two opposing stock markets.

First, the most-prevalent market has been the “pandemic” winners. I’m talking about Amazon (AMZN), Netflix (NFLX), Zoom Video Communications (ZM) and other tech-related stocks. On the majority of trading days since the March 23 lows, these stocks have rallied strongly. Case in point: According to Yahoo Finance, Zoom surged more than 40% on September 1 after the company crushed analysts’ earnings forecasts for its second quarter in fiscal year 2021.

Second, the less-noticeable market has been the consumer discretionary, energy and hospitality stocks. Airline, cruise line, and restaurant stocks, in particular, were crushed in the early stages of the global pandemic, as lock-down restrictions and isolation orders left individuals sitting at home. Energy stocks also tumbled with oil demand plunging.

Clearly, the pandemic winners and tech stocks have dominated over the past six months, and the consumer discretionary, energy and hospitality stocks have lagged. Here’s the interesting thing, though: we saw that on days when the tech-heavy group was weak, the second group moved higher. This rotation in performance has occurred enough to be quite noticeable.

For example, according to Yahoo Finance, Carnival (CCL), Marriott (MAR) and United Airlines (UAL) rallied 12%, 9% and 9%, respectively, during the two trading days of August 27 and 28. Amazon, Netflix and Zoom all dipped lower on August 27. And then, on Monday, August 31, the tech stocks rallied again, and the hospitality stocks traded lower.

Interestingly, though, the divergence between these two buckets of stocks is growing less pronounced, and we’re starting to see a bigger mix of stocks drive the market. So the question is: Is a big rotation in stocks coming?

According to several market pundits, a rotation in stocks has already started.

Jim Paulsen recently commented that the rotation into cyclical stocks, as well as energy, financial, industrial and small-cap stocks, is happening now. Paulsen stated, “I think a rotation is already taking place. It’s not dramatic, it’s not robust, but I think it’s already starting and it’s going to get more robust in the coming year.”[2]

The reality is that COVID-19 cases have peaked and started to decline dramatically across the U.S. The Wall Street Journal recently reported that new coronavirus cases have fallen to the lowest level since late June, with less than 50,000 cases per day.[3]

So, cyclical stocks are garnering a fair amount of attention because Wall Street is growing more and more optimistic that the U.S. economic recovery may now have legs to stand on.

It’s certainly a positive development that several buckets of stocks are now starting to lead the market higher. But I urge you to remain cautiously optimistic. It’s still too early to determine if stocks are merely playing catch up or if this is truly the start of a new market rotation.

To determine which stocks might be a good fit for your personal portfolio in the current market environment, give me a call today. I’d be happy to discuss the recent market rotation and review your current holdings.

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[1] https://www.barrons.com/articles/the-stock-market-is-having-a-fantastic-august-what-history-says-happens-next-51598901977

[2] https://markets.businessinsider.com/news/stocks/stock-market-outlook-rotation-already-started-leuthold-paulsen-cyclical-buy-2020-8-1029537648#

[3] https://www.wsj.com/articles/coronavirus-latest-news-08-24-2020-11598258429