Traders work on the floor of the New York Stock Exchange (NYSE), July 21, 2021.
Brendan McDermid | Reuters
It’s late August so the market should be on holiday like so many of us.
However, since the pandemic started, no one really keeps track of what month it is – how was the holiday party last winter, your birthday party or the company outing in the summer? – we should also not assume that the S&P 500 or any other index is keeping a close eye on the calendar.
So, what has the market been up to lately? The answer from 20,000 feet would be “grinding higher.” Through August 20, the S&P was up 18.3% year-to-date, 6.8% in the past three months and 2.7% in the past month.
Beneath that calm and upward sloping surface, however, lies some serious sector and theme rotation. The table below illustrates some of these dramatic shifts. Energy and financial services were the darlings of the market early in the year, but the tap closed abruptly in May. Oil and gas stocks are roughly in line with the general market and are down nearly 12% in the past three months from August 20. Similarly, the financial sector lost momentum as interest rate hikes stalled and reversed in March.
Rotating in and out of favor
In mid-May, the perennial winners of the past decade, technology and communication services, came back into fashion and made an impressive comeback to give both groups an edge in the market. This trade also started to tire in late July, leaving the major digital players in limbo for the past month.
The market is up just 2% in the past month and a half, or what we could easily lose in a day. What has worked is a mix of sectors, mid-market caps and styles.
Of the 25 best-performing stocks in the S&P 500 over the past six weeks, ending August 20, only three had a market value of more than $200 billion. The value of the entire cohort could fit into Microsoft’s $2.3 trillion capitalization.
The largest sector represented is healthcare, which underperformed in the first half of the year, but was roughly on par with technology and slightly ahead of the index. Both the rise in Covid cases and the feeling that this government will set no limits on drug pricing has helped names such as Moderna, Pfizer, Lilly and Danaher, the largest companies on the list.
In addition to healthcare, there is a diffuse array of industries, within the best recent stocks, with no apparent similarity except their name ending in a consonant. (Nucor, Kroger, Paycom, AMD, Chubb, Under Armor for example).
Don’t go after the trends
But investors should keep in mind that this year, as shown below, the market has shifted loyalty and sporadically punished one-dimensional, unquestioning loyalty to one theme or style, be it reopening, re-closing, small-cap, mid-cap or mega-cap. While large-cap, small-cap and value growth each delivered about 16% to 18% in 2021, they achieved those results by switching places throughout the year.
Rather than chasing the performance of a hot group that is about to peak in the near term, how should investors position themselves in a meandering market without getting whiplash?
Avoid getting too attached to one side of the much-discussed growth or value trade. Owning both Facebook and American Express is not a sign of weakness.
Own companies that will thrive in the next two to three years due to their dominance in a growing market, such as United Healthcare and Google, assuming you are happy with their valuation, which we are.
Since inflation is a legitimate concern, even if transient, target companies with some pricing power, either subscription models (Netflix and Salesforce.com); those whose revenue is a percentage of sales to customers (Visa and PayPal); or markets so strong that they have price flexibility (Sherwin-Williams and Facebook).
Above all, remember that the market will realize that it is autumn. It will stop squirming and will likely choose a more decisive course of action. This walkabout probably won’t last long.
Karen Firestone is chairman, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management services to families, individuals and institutions.