The Great Rotation
Wade Slome, CFA, CFP?
President/Founder, Sidoxia Capital Management, LLC; Author
There are many styles of investing, and many ways to make money in the stock market. Just like the styles of men’s ties or women’s dresses come in and out of fashion, so too do the styles of investing. Some stick around for a long time, while other fads flop in short order, leading consumers to rotate into new fashions. I’m still waiting for my Bermuda shorts and pleated pants to come back in style. At this year’s Olympics, the broad array of styles has been on?full display.
Growth & Tech in Style
The stock market has been on a one-way freight train riding on the coattails of large capitalization growth stocks, primarily technology stocks, especially those associated with technology and artificial intelligence (AI). You can see the dominance of the Growth style over Value in the 30-year?chart below.
Source:?Yardeni.com
When the blue line is sloping upwards, that means Growth stocks are outperforming Value stocks, and when sloping downwards, Value stocks are outperforming Growth Stocks. For most of the 1990s, Growth was dominant, and ever since the aftermath of the 2008 Financial Crisis, Growth stocks have once again overshadowed Value stocks a majority of the time (2022 being a short-lived reprieve for Value stocks).
This mega-Growth trend reversed last month (at least temporarily), and investors decided to rotate out of large winners into the previously shunned areas of the market, including Small Cap and Value stocks. You can see in the?chart below?that Small Caps (S&P 600) have underperformed Large Caps (S&P 500) over the last six years.
Source:?Yardeni.com
Is this rotation sustainable? At this point, I’d say it’s too early to tell, but during periods like these, when Wall Street darlings like NVIDIA Corp (NVDA) suffer a large hit (e.g., down -17% for NVDA since the June peak), diversification benefits are pushed to the forefront. The lesson of the year 2000 technology bubble bursting taught a generation of investors that getting overly concentrated in a single sector of technology stocks can be seriously dangerous to your wealth and financial well-being. By selecting a diversity of eggs in your basket, like Value and Small Cap stocks, you can protect your nest egg when there are substantial rotations like we experienced last month. Diversification is a core tenet of our investment philosophy at?Sidoxia.
In order to place the recent rotation in perspective, let’s look at how a range of indexes performed last month. The Dow Jones Industrial Average increased a hefty +4.4%, while the S&P 500 finished up modestly +1.1%. As investors rotated out of technology (-3.3% – Technology Select Sector SPDR Fund / XLK), a good chunk of those sales rotated into small cap stocks (+10.3% – iShares Russell 2000 ETF / IWM) and value stocks (+5.1% – iShares Russell 1000 Value ETF / IWD).
Despite concerns over global geopolitics, political election madness, and a slowing economy, investors are more focused on the positive prospect of future interest rate cuts by the Federal Reserve, starting in September with a probability exceeding 90% (see chart below).
Source:?CME Group
Some investors got caught up in the dizzying rotation last month, but timing these rotations is nearly impossible and one month does not make a long-term trend. Rather than getting caught up in a fool’s errand, make sure your investment portfolio is diversified and built to withstand volatile rotations.
Wade W. Slome, CFA, CFP?
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including NVDA, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.