Investors weigh the new leaders

money-glitz | REUTERS 1 Mar 2021

A shakeup in stocks accelerated by last week's surge in Treasury yields has investors weighing how far a recent leadership rotation in the US equity market can run, and its implications for the broader S&P 500 index.

Moves last week further spurred a shift that has seen months-long outperformance for energy, financial and other shares expected to benefit from an economic recovery, while a climb in Treasury yields weighed on the technology stocks that have led markets higher for years.

The two-track market left the S&P 500 down for the week, and sparked questions about whether it could sustain gains going forward if the tech and growth stocks that account for the biggest weights in the index struggle.

So far this year, the S&P 500, which gives more influence to stocks with larger market values, is up 1.5 percent, while a version of the index that weights stocks equally is up 5 percent. "That just tells us the gains are less narrow, more companies are participating, and that's healthy," said James Ragan, director of wealth management research at DA Davidson.

The focus on market leadership comes as investors are weighing whether the S&P 500 is due for a significant pullback after a 70 percent run since last March, with the rise in long-dormant yields the latest sign of trouble for equities as it means bonds are more serious investment competition.

Tech and momentum stocks helped drive returns in 2020 "when everyone was locked down and all they had was their computer," said Jack Ablin, chief investment officer at Cresset Capital Management. "Now it seems with the vaccines, the stimulus and the prospect of reopening that we are looking out toward a recovery phase."

The shift in the market this week is building on one that was fueled in November, when Pfizer's breakthrough Covid-19 vaccine generated broad bets on an economic rebound in 2021.

Since then, the S&P 500 financial and energy sectors are up 29 percent and 65 percent, respectively, against a nearly 9 percent rise for the benchmark index and 7 percent rise for the tech sector.

Despite the gains, there remains "plenty of room for the reflation trade to run from a valuation perspective," Lori Calvasina, head of US equity strategy at RBC Capital Markets, said. RBC is "overweight" the financials, materials and energy sectors.

Rising rates tend to be favorable for more cyclical sectors, David Lefkowitz, head of Americas equities at UBS Global Wealth Management, said. Still, setbacks with the economy could revive the stay-at-home stocks that thrived for most of 2020.

And with a GameStop-fueled retail-trading frenzy taking hold this year, banks and other stocks in the reopening trade may fail to draw the same attention from amateur investors as stocks such as Tesla, said Rick Meckler, partner at Cherry Lane Investments. "There isn't the pizzazz to those stocks," Meckler said. "There rarely is a potential for stocks to make the kind of moves that big tech growth stocks have made."



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