Sometimes you can feel the wind shift directions right as it happens: on a boat, a bike, or even standing outside.
That is how it felt a few weeks ago when I saw that biggest movers in our portfolio included an unfamiliar mix: a few large tech names, an industrial, a financial, and a real estate company.
That caught my eye because for weeks, if not months, what worked were stocks within three categories: reopening (airlines, casinos, hotels), economically sensitive (energy, machinery, banks), and the hot momentum stocks (Reddit’s WallStreetBets).
What hadn’t worked were highly durable quality growth stocks, particularly in technology and communications, such as Apple, PayPal, Facebook, Netflix, and Amazon, that propelled the market forward in 2020 due to their remarkable growth during the pandemic.
These companies that thrived amid Covid lost their luster once the hope of effective vaccines and emergence from purgatory became a reality.
Emerging in a recovery
As the table below illustrates, the first two-and-a-half months of the year were massive for the energy, financials, and industrial sectors that would bounce back hard with strong gross domestic product growth.
Technology, the 2020 winner, trailed these groups as well as the overall S&P 500.
% CHANGE FOR 2021
CATEGORY 12/31-3/15 3/15-4/5
S&P 500 6.00% 2.80%
ENERGY 40.10% -6.40%
FINANCIALS 17.40% 0.90%
INDUSTRIALS 10.10% 2.80%
TECHNOLOGY 2.00% 4.30%
In addition, January brought frenzied buying by retail and professional investors of dozens of exciting cloud computing, electric vehicle-related, and biotech vertical stocks, while Reddit and Robinhood message boards fueled unprecedented trading in GameStop, AMC Entertainment, and an unlikely cohort of market darlings.
The mania died down in mid-February, and most of these stocks retreated, some significantly.
Then, in mid-March, the wind changed.
By the time I had gotten sick of yelling at TV commentators who insisted that the only stocks worth owning were the “reopening trade,” Apple, Netflix, and Google began to show some signs of life again.
The QQQ ETF, a good proxy for large-cap technology stocks, had risen about 7% year to date compared to the S&P 500 Value index’s 12.3% gain.
Meanwhile, the QQQ ETF is up just over 5% from March 15th through today, compared to about 1.1% for the value names.
Beyond a case of investors selling high and buying low, what is behind this move?
Fundamentals in focus
One idea that seemed worth investigating is whether the market has become more discerning about fundamentals rather than buying simply based on a theme (reopening), sector (energy), new technology (EV), or proponent (Reddit).
