This is not about the popular Tyler Perry’s The Haves and the Have Nots TV drama. Nor does this refer to the two kinds of people – the wealthy and the poor and the income gap that separates these two groups. Rather this is about how the Coronavirus has created a market of the “haves” and the “have-nots.”
While many investors and traders panicked during the Feb-Mar 2020 bear decline the subsequent recovery has led to two vastly different and divergent paths between the haves and the have-not's sectors and stocks. The gap continues to widen further between the haves and the have-nots suggesting the letter-form trajectory of the recovery is taking on the paths of a K-shaped recovery.
For the bigger, cash-rich, and high credit quality companies with solid secular growth, the Covid-19 pandemic were just a minor speed bump in the road toward new record highs. This is the V-type portion of the K-shaped recovery. On the other hand, many smaller, overleveraged, low credit quality companies with limited growth prospects have faltered and deteriorated. Some may even be headed toward bankruptcy. This resembles the U-type or the L-type part of the K-shaped recovery.
Big Technology and sheltered in place sectors have been the dominant story since the start of the pandemic. However, over the past few weeks, money appears to be rotating into some of the lagging sectors such as Materials, Industrials, Real Estate, Transports, and Financials. This is encouraging as this suggests market breadth may be expanding.
So, the question is this another healthy profit-taking process within the Technology sector and the sheltered in place stocks or is this the start of a major rotation to value related sectors/stocks and away from the momentum and growth areas.
The SPX Index (SPX – 3,380.35) has now gained 4.63% on a year-to-date basis. Given the sharp setback during Feb-Mar 2020, this is a remarkable feat, if not, an unprecedented recovery from the Mar 2020 bottom.
A brief review of the 11 major S&P 500 Sectors support the thesis that investors continue to favor S&P Technology (XLK – 25.25% YTD), Consumer Discretionary (XLY – 15.37%), Communication Services (XLC – 11.56%), and Healthcare Care (XLV – 6.15%). Consumer Staples (XLP – 3.35% YTD) and Materials (XLB – 3.12%) are both within striking distance of outperforming the SPX Index, at least from a relative price perspective. The S&P sector laggards continue to be heavily concentrated within Energy (XLE – -33.46% YTD), Financials (XLF – -16.78%), Real Estate (XLRE – -4.99%), Utilities (XLU – -3.85%), Industrials (XLI – -3.53%).
In summary, although there may be new money coming from the sidelines that favor some buying in the lagging S&P 500 sectors it is simply too early to substantiate, at least from a technical basis, a sustainable and longer-lasting rotation away from the growth-related sectors such as the S&P Technology, Consumer Discretionary, Communications, and Healthcare. We will continue to closely monitor the above technical developments as the leading sectors and stocks will help to decide the duration and the magnitude of the current Mar 2020 to present bull rally.