Everything that seemed to be driving stock prices a month ago has been flipped upside down. Tech is cool again.
The tech-heavy Nasdaq Composite is slightly down this week, but it’s still very close to all-time highs.
Only a month ago, investors were bailing from tech because interest rates were headed higher.
That’s supposed to hurt value stocks. Now, interest rates seem to be stabilizing.
All of this is odd … rates are still down slightly despite plenty of evidence that inflation is heating up.
The Consumer Price Index (CPI) report last week revealed a 5% year-over-year surge — and that excludes the so-called volatile food and energy components.
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But it doesn’t matter … the reopening trade is being undone. Banks, industrials and commodity-centric stocks have been clobbered.
For example, shares of Deere & Co. (NYSE: DE) — the legendary farm equipment and finance company that unfortunately touches all three categories — are down to around $329.33. The stock was hovering just south of $400 in early May.
Managers reported terrific financial results recently, though it didn’t matter. Mostly due to profit-taking, shares continued lower.
Traders are fleeing cyclical stocks just as quickly as they’re buying tech … again.
I get the tech rally. Like I often say, digital transformation is the most important investment trend in a generation.
Platform providers are fundamentally changing the way corporations operate, providing a powerful tailwind for future growth. Among them are:
- Alphabet Inc. (Nasdaq: GOOGL)
- NVIDIA Corp. (Nasdaq: NVDA)
- Microsoft Corp. (Nasdaq: MSFT)
- Amazon.com, Inc. (Nasdaq: AMZN)
- salesforce.com, Inc. (NYSE: CRM)
- The Trade Desk, Inc. (Nasdaq: TTD)
That business isn’t going away: It’s only getting started.
Still, investors should strongly consider saving some room in their portfolios for cyclicals — the most economically sensitive stocks that look poised to keep winning.
Investing isn’t normally a zero-sum game where one rallies at the expense of the other.
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Plus, the idea that the reopening trade is over seems premature given that many parts of the economy have yet to fully restart.
California just lifted many of its mask and social distancing requirements a few days ago.
Cyclicals have enjoyed an incredible run so far this year, and based on the metrics, I see continued success on the horizon.
Earnings per share (EPS) growth projections for many cyclicals are 15 percentage points higher than for so-called defensive stocks, according to Evercore data.
Some may say that the strongest growth is already reflected in prices, but I strongly doubt it.
Savvy investors should consider playing this trend by using near-term weakness to target cyclicals.
Best wishes,
Jon D. Markman
