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Marc Cuniberti: Pandemic-driven sector rotation

Marc Cuniberti
Columnist
Marc Cuniberti
Laura Mahaffy/lmahaffy@theunion.com | The Union

“Sector rotation” in stocks means money comes out of one area of investment and moves into another.

At any given time, certain areas of investing can be hot while others are not. Certainly during the period leading up to the dot.com stock mania, one could safely say technology stocks were in favor and explosive price growth was the sought after result.

Any stock with a dot.com moniker would be gobbled up by greedy investors looking for fast and furious gains. Meanwhile the old “stodgy” stocks that paid consistent dividends like utilities or oil stocks may have been shunned in favor of the hot stocks of the day. Investors thought the stalwart stock names of oil, food, autos or what-have-you did not offer the lighting-fast, explosive growth that a dot.com stock promised.

Fast forward a few years and dot.com fell from favor. They were replaced by housing stocks and its various related sectors.

The reality is sectors can fall in and out of favor and for a variety of reasons.

Sector rotation can take place at any time and for a variety of reasons. A new discovery such as a cure for cancer could cause a sector rotation into health care or pharmaceutical stocks. History is rife with well-known sector rotations.

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A decade or so back, the health benefits of grape related drinks caused a rotation into the wine and beverage sectors. Looking farther back the Texas oil bonanza caused oil and oil related equipment producers to rally. The movement to alternative energy caused related stocks in that sector to rise while hydrocarbon type stocks may have fallen.

The reality is sectors can fall in and out of favor and for a variety of reasons.

It’s this ebb and flow of investor dollars that may cause stock prices in certain sectors to fall in mass for no other reason than a sector is becoming yesterday’s news.

Catch a hot sector early and profits could be made. Be late to the party or stay too long, and falling stock prices reflecting investors vacating the sector for greener pastures could hurt portfolio balances.

Early on during the COVID-19 shutdown, most all areas of the stock market fell in concert. A few weeks in and investor monies surfaced into a variety of stock sectors. Biotech and pharmaceutical stocks caught an early bid as did the internet communication stocks, streaming movie companies, online retailing and the companies that serviced and maintained the conduits of such businesses.

Meanwhile the hardest hit sectors were the vacation and travel stocks like hotels, theme parks, airlines, cruise ships and similar sectors. Companies that by their nature facilitate people in close proximity to each other like movie theaters and restaurants also suffered.

Sector rotation into the “stay-at-home” economy stocks caused a significant river of investor dollars to flow into certain sectors while other sectors fell mercilessly.

Last week saw another sector rotation that may have taken many investors and advisors by surprise and it was fast and furious in its migration of dollars.

On Friday June 5, the Labor Department reported that May payrolls increased by 2.5 million, shocking investors and analysts alike. Forecasters had called for another dreadful report following a sharp decline of 20.7 million lost jobs in the prior month. The gain was the largest positive number going back to 1939.

That report, coupled with the fact that all 50 states were in various stages of reopening, caused an obvious sector rotation out of the “stay-at-home” stocks into what I call the “get-away-from home” stocks.

Video conferencing, health care, online shopping and other related sectors fell hard with little exception or reason, while the hardest hit shutdown stocks like hotels, airlines, cruise ships, retail and other related areas rose.

The stocks in these areas had been stealthily lifting off their lows in recent days and the jobs report lit the afterburners of many of these companies.

This was a clear example of nothing more than sector rotation, based on investor expectations that the lows in some of these stocks may have already been reached and that it was time to go shopping in the bargain basement of the stock market. Meanwhile holders of the stay-at-home stocks were left scratching their heads as to what had happened to cause their recent favorite stocks to crater. The answer was nothing specifically. They were simply a victim of sector rotation.

Marc Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, 530-559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.


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