Over a year ago, FAANGs and technology-based stay-at-home stocks dominated the marketplace. Growth stocks outperformed value stocks by one of the largest discrepancies in decades and by the biggest dichotomy since the dot-com era of 1999-2000.
Many would like to see the world return to normal. Unfortunately, the COVID-19 pandemic has forever changed our lives, influencing the way we live, work, interact, spend, and invest. The pandemic may have accelerated many of the technology trends that would have happened anyway. But it has also created excessive buying in many of the growth-related names. The structural stay-at-home theme is far from over, at least from a long-term structural perspective. Nonetheless, investors continue to favor the reflation trade over the Technology/growth call.
Here is the timeline of the investment shifts over the past year.
Year-end 2020 – Consumer Discretionary, Industrials, Technology, and Financials
Toward the year-end, 11/23/20, we ran another screen of the top 100 SCTR list. It shows a promising shift in buying toward economically sensitive sectors as favorable results from the Covid-19 vaccine gave investors hope for an impending economic recovery. Investors funded their purchase of the reopening stocks by selling the gains incurred from the stay-at-home plays. On 11/23/20, a quick review of the top 100 large-cap list ranked by SCTR scores confirmed economically sensitive sectors as they dominated the list. For instance, the largest concentration of stocks from the top 100 SCTR list were Consumer Discretionary (26 names), Industrials (21), Technology (16), and Financials (9).
Early 2021 – Consumer Discretionary, Financials, Energy, Technology, and Industrials
On 2/23/21, we ran another SCTR study on the top 100 technical ranked names. The improving economic outlook led more investors to favor the reflation sectors (i.e., Consumer Discretionary and Industrials). However, it also showed two new emerging themes – rising interest rates (Financials) and rising inflation (Energy). The top 100 SCTR list on 2/23/21 showed two S&P sectors dominating half of the list – Consumer Discretionary (28 stocks) and Financials (25 Financials).
It is understandable to expect Consumer Discretionary stocks to gain ground because of the expectation of the reopening of the economy. However, we were pleasantly surprised to see the Financial sector quickly moved into the second largest concentration of stocks occupying the top 100 SCTR list. If you recall, only 9 S&P Financial names made it to the 100 SCTR lists in the 11/23/20 study. Higher interest rates and the rotation from growth to value would help to explain the increase in interests in the Financial Sector.
Energy (12), Technology (11), and Industrials (10) accounted for another 33 names within the top 100 SCTR list. Also, within the top 20 SCTR list, were 8 Consumer Discretionary, 4 Energy, and 4 Communication Services stocks (i.e., Entertainment and Publishing).
It is interesting to note not a single Technology name made it to the top 20 SCTR list, suggesting investors favor the reflation trades over the structural growth sector trade, at least from a near-to-medium term perspective.
End of 1st Quarter 2021 – Financial, Consumer Discretionary, Energy, and Industrial
With one week before the end of the 1st quarter, on 3/24/21, the top 100 SCTR list continues to suggest investors favoring the reflation trade. The S&P Financial sector assumed its leadership role with 29 stocks within the 100 SCTR list. The Consumer Discretionary slipped slightly into second place with a respectable 20 names. The Energy and Industrial sectors gain sponsorships with 13 stocks and 12 stocks, respectively. The same reflation sectors dominate the two smaller lists - top 10 and 20 SCTR lists as represented by Consumer Discretionary sector (4 stocks within the top 10 list and 7 stocks in the top 20 list), Energy (2/5), Financial (1/4), and Communication Services (2/3). Like the prior SCTR study on 2/23/21, Technology stocks failed to place on the top 10 and 20 SCTR lists. Nonetheless, a deeper dive still shows 9 Technology names residing within the top 100 SCTR list with 3 Semiconductors and 3 Computer Hardware stocks showing Technology leaderships.
Mid-year 2021 - Financial, Energy, Consumer Discretionary, and Technology
Financials continue to dominate the list on the 6/8/21 screening of the top 100 SCTR list with 24 names. Energy regained its leadership role with 18 stocks, and Consumer Discretionary rounded out the top three with 14 names. Technology stocks returned to the top 4 sectors with 12 stocks. It closely resembles the early 2021 study (2/23/21). The top 20 SCTR list is heavily dominated by Energy stocks, with 7 out of 20 names. The remaining names consist of Technology (3), Real Estate (3), Financial (2), and Healthcare (2).
With 56% of the top 100 list concentrated in reflation stocks, this would imply the economic recovery is still sustainable. The above analyses also suggest the easy returns that may have occurred during the early expansion phase. Also, with the Industrials (9) and Materials (5) slipping from their previous leadership roles and the Real Estate (9) sector rising, it would further suggest the business cycle is moving past the early expansion phase and headed toward the mid-cycle stage likely during the second half of the year.
Although there have been times when the cycles have skipped a phase or two, the typical business cycle shows a chronological and consistent procession of different sectors outperforming at various stages of the economic cycles. Consumer Discretionary, Financials, Industrials, Materials, Real Estate, and early-cycle Technology tend to outperform during the early phase of the business expansion cycle. As you head toward mid-cycle, which tends to be the longest of the economic cycles, Technology and Communication Services tend to excel. Economically sensitive sectors such as Consumer Discretionary and Materials also begin to underperform their peers.
We recommend investors closely monitor the above developments. Pay specific attention to the Technology sector and the Communication Services sectors for signs of the emergence of leadership roles. An expanding/growing economy, higher market volatility, and leaderships from Technology and Communication Services are the hallmarks of the transition from the early expansion to the mid-cycle phase.