By John Lau
September 2, 2024 – The rotation from tech to the “rest” of the market continued apace last week as traders used initial tech weakness as a profit taking opportunity. On a sector level, there was a clear cyclical preference as the solid GDP (Q2 GDP rose 3.0% saar[1] vs. (E) 2.8% saar) and jobless claims reports (unemployment claims are down 2,000, weekly jobless claims fell to 231K[2] vs. (E) 232K) and “not as good as hoped for” tech earnings (NVDA dropped more than 6% after earnings call[3]) fueled the rotation into cyclicals, and, to a lesser extent, defensive sectors.
Since the late-2022 lows, the stock market has steadily rallied with mega-cap, growth-focused tech stocks leading the broader S&P 500 higher with only short-lived and moderate pullbacks. Each time a pullback had occurred, some profits were taken off the table with the Mag 7 names leading the way lower, but they would also lead the subsequent recovery once the market stabilized and the rally resumed to fresh record highs led by tech darlings such as NVDA, MSFT, and AAPL. The selloff that occurred between the mid-July record highs and August 5 lows was more of the same with large-cap tech taking the brunt of the losses on the way down. The stabilization process this time around, however, was different. This time, the dip buyers did not pour back into the Mag 7, tech-dominated Nasdaq 100, and/or growth-focused semiconductor index, SOX. Instead, the best performing sectors over the last month (so in the midst of the summer pullback but prior to the volatile establishment of the Monday, August 5 lows) were some of the worst performing sectors relative to the broad S&P 500 index since the 2022 lows, including Financials, Industrials, Consumer Staples, Utilities, and Real Estate.
The strong outperformance by Utilities and Real Estate over the last month offers measurable evidence that equity investors are pricing in peak interest rates as both sectors are historically sensitive to market interest rates as Utilities offer a relatively safe alternative yield to corporate and government bonds while the Real Estate industry generally maintains an inverse correlation to the primary trend in rates. Looking to the other notable gainers, Consumer Staples and Health Care are two traditionally defensive sectors, and their solid outperformance is consistent with investors rotation into safer, more value-oriented corners of the market as growth-oriented tech stocks with high valuations are being shunned. These money flows are consistent with both peak interest rates being priced in as well as imminent Fed rate cuts amid a slowdown in growth that is expected to limit consumer spending on discretionary items. It is important to note that these sector rotations are defensive and cautious but not necessarily pointing to a hard landing scenario, just the acknowledgment that consumer spending is expected to slow to some degree.
Bottom line, super-cap/AI tech has not been leading this market higher lately. They’ve rallied, but not to the extent we saw in early 2024, and certainly not as in 2023. And that raises the question: Can this market continue to rally if the momentum names cannot carry the S&P 500? And the truth is, it is unclear where the leadership will come from to carry this market higher in a slowing growth, falling-yield environment (which usually benefits defensive sectors and value). If this market is going to move substantially higher, it needs to have the momentum names trading well, and recently, that simply hasn’t been the case. If that continues, it is an incremental negative we shouldn’t ignore.
[1] Bureau of Economic Analysis/ U.S. Dept of Commerce; saar means seasonally adjusted annual rate.
[2] U.S. Dept of Labor.
[3] NVDA closed on August 28 at $117.59, down $8.02 or 6.4%, its lowest close since August 13, according to Dow Jones Market Data.
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Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
The Rotation from tech to the “rest” of the market continued
By John Lau
September 2, 2024 – The rotation from tech to the “rest” of the market continued apace last week as traders used initial tech weakness as a profit taking opportunity. On a sector level, there was a clear cyclical preference as the solid GDP (Q2 GDP rose 3.0% saar[1] vs. (E) 2.8% saar) and jobless claims reports (unemployment claims are down 2,000, weekly jobless claims fell to 231K[2] vs. (E) 232K) and “not as good as hoped for” tech earnings (NVDA dropped more than 6% after earnings call[3]) fueled the rotation into cyclicals, and, to a lesser extent, defensive sectors.
Since the late-2022 lows, the stock market has steadily rallied with mega-cap, growth-focused tech stocks leading the broader S&P 500 higher with only short-lived and moderate pullbacks. Each time a pullback had occurred, some profits were taken off the table with the Mag 7 names leading the way lower, but they would also lead the subsequent recovery once the market stabilized and the rally resumed to fresh record highs led by tech darlings such as NVDA, MSFT, and AAPL. The selloff that occurred between the mid-July record highs and August 5 lows was more of the same with large-cap tech taking the brunt of the losses on the way down. The stabilization process this time around, however, was different. This time, the dip buyers did not pour back into the Mag 7, tech-dominated Nasdaq 100, and/or growth-focused semiconductor index, SOX. Instead, the best performing sectors over the last month (so in the midst of the summer pullback but prior to the volatile establishment of the Monday, August 5 lows) were some of the worst performing sectors relative to the broad S&P 500 index since the 2022 lows, including Financials, Industrials, Consumer Staples, Utilities, and Real Estate.
The strong outperformance by Utilities and Real Estate over the last month offers measurable evidence that equity investors are pricing in peak interest rates as both sectors are historically sensitive to market interest rates as Utilities offer a relatively safe alternative yield to corporate and government bonds while the Real Estate industry generally maintains an inverse correlation to the primary trend in rates. Looking to the other notable gainers, Consumer Staples and Health Care are two traditionally defensive sectors, and their solid outperformance is consistent with investors rotation into safer, more value-oriented corners of the market as growth-oriented tech stocks with high valuations are being shunned. These money flows are consistent with both peak interest rates being priced in as well as imminent Fed rate cuts amid a slowdown in growth that is expected to limit consumer spending on discretionary items. It is important to note that these sector rotations are defensive and cautious but not necessarily pointing to a hard landing scenario, just the acknowledgment that consumer spending is expected to slow to some degree.
Bottom line, super-cap/AI tech has not been leading this market higher lately. They’ve rallied, but not to the extent we saw in early 2024, and certainly not as in 2023. And that raises the question: Can this market continue to rally if the momentum names cannot carry the S&P 500? And the truth is, it is unclear where the leadership will come from to carry this market higher in a slowing growth, falling-yield environment (which usually benefits defensive sectors and value). If this market is going to move substantially higher, it needs to have the momentum names trading well, and recently, that simply hasn’t been the case. If that continues, it is an incremental negative we shouldn’t ignore.
[1] Bureau of Economic Analysis/ U.S. Dept of Commerce; saar means seasonally adjusted annual rate.
[2] U.S. Dept of Labor.
[3] NVDA closed on August 28 at $117.59, down $8.02 or 6.4%, its lowest close since August 13, according to Dow Jones Market Data.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
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