The markets have been a bit choppy this week—and much of that choppiness is due to back-and-forth intra-market rotations. Looking back to Monday, the technology-heavy Nasdaq Composite moved into correction territory, falling 10% from its peak. That very same day, the Dow Jones Industrial Average reached a new record, driven by its greater exposure to sectors poised to benefit from an economic reopening such as industrials, financials, and retail. However, by Tuesday those positions reversed sharply as the Nasdaq rose nearly 4% in a single day and cyclical areas like energy and banks struggled.
While recently beleaguered technology stocks did get a reprieve on Tuesday, more economically sensitive areas of the market have been winning the day in aggregate in 2021. This week’s Senate approval of President Joe Biden’s $1.9 trillion COVID-19 relief bill may help further that trend. The stimulus plan includes $1,400 direct payments to most Americans, $350 billion in support for state and local governments and extends emergency unemployment benefits. The hope is this package will help sustain the U.S. through the end of the pandemic as the economy continues to heal. The House of Representatives gave the bill its final approval on Wednesday and President Biden is expected to sign it into law before the weekend.
While the good has mostly outweighed the bad for stock investors this year, those investing in high quality bonds have struggled in recent weeks. Bonds have performed poorly as long term-rates have risen, causing their prices to weaken. While this back-up in rates has eased in recent days, the reason rates have moved up so strongly and swiftly is because the market is pricing in renewed economic growth and, to some extent, inflation. Regarding inflation, gasoline prices have been on the rise, but there have been few price surges in other parts of the economy. Thus, if the bond market is pricing in inflation worries, it is possible these fears may be overblown.
Coming full circle to the intra-market rotations: Value stocks have mightily underperformed their growth counterparts in recent years. However, this trend has reversed–to a significant degree–since late 2020 when signs appeared that the economy was likely to recover more quickly than expected. The question is: Where do the markets go from here? With such a strong recovery in cyclical value stocks, it may make sense to consider a barbell strategy, with equal exposures to both value and growth stocks. The value exposures would allow investors to continue to benefit should sectors tied to the reopening of the economy continue to perform well while the growth exposures could provide a nice counterbalance should the market swiftly move back toward technology companies.
Stay safe and be well.
Market comments are based on the various indexes which are unmanaged and cannot be directly invested into. Past performance is no guarantee of future results.
There is no assurance that any investment strategy will be successful. Investing involves risk, including the possible loss of principal.
The information provided is for educational purposes only and is not a recommendation of any kind or investment advice. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed.
March 11 Weekly Market Update
March 11, 2021|