New leadership for stocks: in with tech, energy, and banks, out with interest rate sensitive.
The market is rotating into new leadership as the facts on the ground have been changing. These trends have become especially notable in the past couple weeks:
- A change in investor expectations on interest rates is pushing bond yields higher, helping banks and hurting interest rate sensitive stocks, which had seen valuations move to unsustainable levels;
- Improving economic news helping cyclical stocks (the September ISM Non-Manufacturing Index saw its greatest one-month increase on record)
- An oil rally pushing Energy stocks higher, particularly exploration and production;
- A major semiconductor upcycle that is moving technology stocks higher.
Put it together, and we have new market leaders.
Market leaders (since July 1)
Banks (KBE): up 12 percent
Technology: up 13 percent
Oil & gas exploration & production: up 11 percent
And market losers:
Interest rate-sensitive (since July 1)
Utilities: down 10.4 percent
REITs: down 8 percent
Telecoms: down 10 percent
Another former darling, Consumer Staples, are also weak, down 6 percent from its July highs. Low volatility names like Dr. Pepper Snapple, Campbell Soup, McDonald's, Kellogg, Kimberly-Clark and Coca-Cola were all the rage a year ago, but are all well off their highs.
What does it all mean? The biggest single mover of volatility is the Fed. Financials and technology are the two largest sectors in the S&P 500, while utilities, REITs, and telecoms are small. Bulls hope that strength in financials and technology, if it continues, should help mitigate any serious selloff driven by rate-hike fears.
For the moment, that scenario is holding.