The Stock Market Is Dropping Again. There’s a Change Underway.

 The Stock Market Is Dropping Again. There’s a Change Underway.

 

Nicholas Jasinski

Sept. 4, 2020 12:54 pm ET

 

Stocks are dropping for a second-straight day on Friday, with technology shares once again leading the market lower. The Nasdaq Composite was down 3.2%, dragged lower by hefty losses from software, semiconductor, and Big Tech names.

The S&P 500 fell 2.5% and the Dow Jones Industrial Average lost 2.1%. The S&P 500 technology sector was off 4%—the worst performer within the index. Apple (ticker: AAPL) dropped 4.2%, Zoom Video Communications (ZM) lost 5.8%, and Nvidia (NVDA) tumbled 7.1%.

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Better off were more cyclical and beaten-up sectors: Financials slipped 0.7% and industrials lost a comparatively meager 0.9%. Many consumer-sensitive banks were higher.

All 11 sectors of the S&P 500 also declined on Thursday, but energy and other economically sensitive groups lost the least. Investors could be witnessing the early innings of a shift, or rotation, from growth stocks to cyclicals.

 

That means plenty of market action under the surface, and opportunity for investors to reposition themselves. But if it does continue, it is also a recipe for a performance on the index level that could be flat at best.

The sheer weight of tech stocks in the market relative to the sectors that lagged behind over the summer means it should be a lopsided rotation. And many investors don’t immediately redeploy 100% of their cash when taking profits, of which there are plenty following tech’s surge in August and since the market’s bottom in late March.

Investors can point to plenty of reasons to move money between sectors.

Friday’s upbeat employment report is the latest of many data points showing a continued rebound in global economic activity. Forecasts call for a recovery in many companies’ earnings and sales in 2021. And at least a half-dozen serious efforts at a coronavirus vaccine are in late-stage trials, while treatments are improving.

All of that supports betting on stocks that would gain from an economic recovery.

Other asset classes are following along, noted Evercore strategist Dennis DeBusschere on Friday. Prices for haven investments such as gold and highly rated bonds declined, while economically sensitive small caps outperformed large caps. Copper prices rose.

That makes this different from 2020’s other selloffs in March and June, when investors moved to shed all forms of risk from their portfolios, and flocked to safer assets.

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Whether the rotation continues after the long weekend is anyone’s guess. Pullbacks tend to happen after a momentum-driven rise, and can be merely a pause in the rally. But at the same time, the risks on the horizon are numerous. The success or failure of efforts across the U.S. to have students return to school have implications for the pace of the continuing economic recovery.

The U.S. presidential election tends to come into focus after Labor Day, as politically related news emerges at an even faster clip. Which parties appear likely to control the White House or Congress has the potential to affect the fortunes of several sectors.

Legislators in Washington, meanwhile, continue to work on a second Cares Act. Markets dislike uncertainty more than bad news, one adage goes. And medical experts have warned about the potential for an uptick in virus cases as the weather cools and people move indoors.

Continued low interest rates help investors become more comfortable with eye-watering valuations. Pandemic-related boosts to online shopping, video conferencing, cloud computing, and other tech trends won’t reverse entirely. All of that could make growth stocks appear the better choice once again.