Many investors are preparing themselves for stormy economic times ahead, but you wouldn’t know it by looking at equity prices.
Amid signs of moderating economic growth, a slowdown in the U.S. and global manufacturing sectors, and a bond market that is clamoring for the Federal Reserve to cut interest rates in order to head off further slowing, the S&P 500 index
Dow Jones Industrial
nd the Nasdaq Composite index
have all advanced more than 6% in the month of June.
Looking at the stock market’s sectoral performance so far this month paints an even rosier picture, as its advance has been powered by the most cyclical sectors, like materials, information technology and consumer discretionary, which comprise stocks of companies that tend to do well when economic growth is strong.
“The shift to cyclicals is justified by the fundamentals,” Randy Frederick, vice president of trading and derivatives with Charles Schwab told MarketWatch. “If you look domestically, the deterioration in economic data is not all that bad,” he added, pointing to a strong labor market and other leading economic indicators that suggest the U.S. economy will grow solidly for at least the next year.
Willie Delwiche, investment strategist at R.W. Baird, argued in an interview that while investor interest in cyclical names shows there is no “imminent threat to the economic cycle,” the performance of sectors over the past 12 months paints a more complicated picture of equity-investor sentiment.
During this time frame, the utilities sector has been the best performer, suggesting that investors have been preparing for choppier economic waters ahead, as these stocks typically do better during economic slowdowns.
Nevertheless, the second best performer since June of 2018 is information technology, a sector that features names like Microsoft Corp.
Cisco Systems Inc.
and Visa Inc.
, which have consistently outperformed the market for years.
Over the past year, Microsoft has sported a total return of 39.7%, versus the S&P 500’s 10.1%. Cisco has returned 36.7% and Visa 21.2% over that same time period, according to FactSet.
“One of the themes we’ve seen this year is that as the S&P 500 and Nasdaq have made highs, its a handful of companies within those indexes that have driven those gains,” Delwhich said. “When you start dig into these indexes, broad support isn’t there. So tech isn’t being strong, it’s a handful of tech companies are strong, but they’re big enough to fuel the rally.”
Schwab’s Frederick said that its likely for cyclical names to continue to lead the way, especially if there is a resolution to the U.S.-China trade dispute, which would be a boon to info tech companies in particular.
This dynamic also puts into stark relief the differing stories being told by the bearish bond market and the bullish stock market, but only one story will turn out to be right.
“Almost everything is going up at the same time, and this is the most puzzling thing about markets at the moment,” Frederick said. “Gold
is at six-year highs, bonds are at 2 year highs, and stocks are near all-time highs. All these things can’t continue to go up at the same time forever.”
View more information: https://www.marketwatch.com/story/what-economic-slowdown-investors-bet-big-on-cyclical-stocks-in-june-2019-06-27