Published September 13, 2019
Stocks in the U.S. have come roaring back from the weakness of one month ago, returning to the doorstep of new high ground. Lost in the enthusiasm about new highs, however, is the fact that fully half of the stock market has been treading water for almost two years now. If that lagging half of the market were to break through, stocks would be in a position to substantially rally. Here is the sector composition of the S&P 500 with the sectors that are stuck in neutral marked with blue lines.
Here are charts of three of those sectors so you can see how these groups have just been chopping around for quite some time:
Similarly, international stocks have gone nowhere over the past two years (see the major international non-U.S. ETF below). With central banks, globally, taking aggressive actions to right the global economic ship, it’s certainly possible that we see international stocks find a way to stop their churn and push through to higher ground.
In short, this week’s jump in sectors that have been out of favor has merely brought them back to where they were a few weeks ago – the upper part of a longtime trading range. After many months of choppy, neutral returns in these sectors and across major international stock markets, a little dose of optimism could unleash another leg higher in stock markets broadly. Will we find that optimism in the final quarter of 2019?
Stocks ran in place Monday on little new information, apparently digesting a solid two week rebound that has brought market indexes back near record highs. Encouraging news from China on the trade tariff front seemed to spark a shift in investor mentality toward improved global growth. In that regard, interest rates mounted a strong move higher while lagging portions of the market found buyers; prior winners, such as software and other high-growth issues encountered some heavy selling. The net effect: the S&P 500 closed flat Tuesday while the laggard small-cap stocks shot higher by over +1%. The small-cap indexes are more heavily weighted toward financial shares, which are seen as beneficiaries of higher interest rates and a “normal” – e.g. not inverted – yield curve. Those moves accelerated Wednesday as China announced the suspension of tariffs on certain U.S. goods ahead of upcoming trade talks. The positive tone in trade gave investors reason to pour money into cyclical stocks, which had been sold off while trade tensions were high. The shift away from defensive sectors and bonds and toward more cyclical sectors pushed stock indexes higher by +0.7%. Once again, the move in small-cap shares was substantially greater, while interest rates continued their rise. The European Central Bank (ECB) unveiled a series of aggressive moves Thursday in an effort to head off declining economic fortunes in Europe. The move led to solid gains in overseas stock markets while U.S. markets rose a more modest +0.3%. Stocks gave up early gains Friday to close flat with interest rates again pushing higher. The 10-year U.S. Treasury yield has risen from 1.4% to 1.9% in the span of 10 days, reversing almost all of August’s decline. The about-face comes as trade tensions with China have de-escalated, encouraging investors to embrace a more positive view on global economic growth.
Stocks posted a third straight weekly rise with the S&P 500 (SPY) gaining +1.02% to close above the 3000 level and completely wipe away the August slide. The Nasdaq 100 (QQQ) rose a more modest +0.50% as growth stocks failed to keep up with the rally. The strongest moves came in longtime laggard financial and material stocks, with both sectors sporting almost +4% gains on the week. This shift helped small-cap stocks (IWM) to their best weekly performance this year, rising +4.94%.
Warm wishes and until next week.