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Thread: The Stock Market Rotation

  1. Default The Stock Market Rotation

    There have been sharp changes in the stock markets.

    Those who focus only on the headlines and indexes missed those moves. September unquestionably has been full of surprises for investors.

    First, September is supposed to be the worst month of the year for stocks. Yet, we have a gain of more than 1% in the major indexes.

    The second surprise is the sharp change in the winners and losers. Earlier in the year, the talk was about how the market would be dead if it weren’t for the so-called FAANG stocks: Facebook, Apple, Amazon, Netflix and Google (Alphabet). Technology was the leading sector, with health care following not far behind.


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    Things were very different in September. (The data that follow covers the first three weeks of the month.)

    The tech sector is down 0.23%, and telecommunications is down 3.29%. Utilities, which were doing well earlier in the year, are down 2.01% for the month. Meanwhile, energy bounced back, rising 8.10% for September. Industrials are up 3.87%, financials 3.32% and materials 3.29%.

    Among the major indexes, the Nasdaq is down 1.15% for the month, while the Dow is up 1.87% and the S&P 500 returned 1.21%.

    Smaller company stocks also are making a comeback. For most of the year, large company stocks were the leaders, benefitting from global growth and a declining dollar. In September, the S&P Smallcap 600 is up 4.11% and the S&P Midcap 400 has returned 2.26%.

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    There also was a turnaround in the growth vs. value race. The S&P 500 Growth index, which still is up 18.16% for the year, rose only 0.34% for September. The S&P 500 Value index only has a 7.33% return for the year but rose 2.40% in September.

    Another way to look at the rotation, provided by Bespoke Investment Group, is that the 50 best-performing stocks through August had an aggregate return of 0.14% in September. But the 50 worst-performing stocks through August had a 4.60% return in September.

    Bonds also reversed course. They were doing well for most of 2017 but declined in September. For example, long-term treasuries were down 1.26% for the month, though they still are up 7.65% for the year. Other U.S. bonds had similar performances.

    Commodities also saw changes. Oil is down 12.97% for 2017, and broad-based commodities are down 2.84%. But for September, oil rose 5.92% and broad-based commodities returned 1.92%. Gold had the opposite experience. It rallied most of the year and still is up 12.31% for the year. But it declined 2.16% for September.

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    One trend that continued was the strength of overseas markets. With few exceptions, they delivered solid returns in September. The international index EAFE rose another 2.23% in September for a 20.40% return for 2017. Emerging markets rose another 1.22% for a 2017 return of 30.21%.

    The rotation out of the year’s strongest performers and into weaker performers in U.S. markets allows the major indexes to continue to deliver positive returns. Investors aren’t selling stocks to invest elsewhere; they’re selling certain stocks to buy other stocks.

    Barring a month-ending crash, September will be the sixth consecutive month of positive returns for the S&P 500. Historically, six-month winning streaks are followed by another positive month about 70% of the time and by positive returns over the next three months almost 85% of the time.

    While changes within the stock indexes are likely to continue, it will take a major event to reverse the upward momentum in stocks over the next few months.

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