If you've recently watched sixty seconds on any financial news network or read the business section of any publication, you've now heard about the vicious "rotation" occurring this week in the stock market, from growth to value, momentum to cyclical, or any other two dissimilar groups that would suggest an intentional trade by millions of investors. We would disagree with that characterization.
It looks to us as if the market, or perhaps some very powerful black boxes, noticed that the S&P 500 had gained 20% for the year, and simultaneously hit the sell button for all the best-performing names year to date and the buy button for all the worst-performing stocks in the index.
Before this theory began to gel for us, we became sickened by the portfolio damage we were experiencing on Monday and Tuesday. The carnage seemed indiscriminate rather than sector or capitalization based. However, it became clear that the deep red swatch across the bottom of our screens contained most of our best-performing stocks of the year, and the greenest names included those with the lowest returns for 2019.
The rationale seems to be simple enough; people or machines were selling the winners and buying the losers regardless of the other categories into which these stocks would fit. American Tower, PayPal, American Water Works, Zoetis, and Visa have only one common denominator – they all were up over 40% for the year. Our top five performers early this week include two biotechs, two banks and an industrial, which shared the distinction of being among our worst names for 2019.
This is a year where investors have gravitated toward two groups of stocks – those that did not need China and companies with dependable earnings growth and a dividend exceeding the rate on 10 year Treasuries. The relative losers generally have been energy, commodities, traditional retail and financials.
In a flash(boys), the market suddenly began to ferociously sweep up the eight-month losers and pummel the year's winners. The top-performing stocks in the S&P for the first three days of this week are up an average of 14.1% compared to an average loss of 29% through September 6th. Their ranks included biotech, retail, materials and energy- both growth and "value" names. The week's worst ten were off an average of 9% week-to-date versus an average gain through last Friday of 57%. REITs, tech, services and healthcare comprised this group, which lacked any homogeneity other than their strong advance this year.
The important question right now is whether this phenomenon will last. We have no argument with the theory that some of the strongest S&P names, whether Visa, Mastercard, American Tower, Zoetis and S&P Global, most of which we own, might have leaned a little far out on their skis and could be due for a pause. But has anything changed in terms of earnings' growth and economic winners?
In all honesty, without higher interest rates, the big banks are unlikely to outperform; unless consumers suddenly about-face from their online shopping addiction, most traditional retailers cannot revitalize; and unless a major country slows oil and gas production, you can't drive a long-term rally in energy.
Low inflation and low interest rates tend to push the market multiple higher. With slowing global growth, those companies that can generate earnings expansion and dominate their sectors will command premiums, whether in utilities, real estate, medical devices or software. If trade war and recession are the major risks to the market, they will not comparatively spare this week's darlings, just because they have lagged the market. The quant trade will move again.
Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families and individuals.