Investors Move Back to Cyclicals, Looking for a Hotter Economy Into Yearend

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Another rotation toward value stocks could be underway as investors look for a stronger economy into yearend.

Financials, industrials and materials have gained momentum in the last week. (The key tracking ETFs for all three have broken above their 50-day moving averages.) Meanwhile the Nasdaq-100 and major technology stocks like Apple (AAPL) have drifted after reporting quarterly results.

Stronger economic data could be another factor. Last week’s non-farm payrolls report not only beat estimates. It also featured upward revisions for May and June, plus a sharp drop in unemployment. Yesterday the government announced that 10 million jobs are now unfilled — more than the population of Michigan.

That combination of falling unemployment, increased hiring and record job openings could lead to higher wages and inflation. The Federal Reserve is starting to notice. Vice Chairman Richard Clarida suggested last week that central bankers are preparing tighter monetary policy. Atlanta Fed President Raphael Bostic echoed that message this week saying that “substantial further progress [ on inflation and employment ] has effectively been met.”

The next thing to watch? Tomorrow morning’s consumer price index at 8:30 a.m. ET. It’s followed by other inflation reports on Thursday (producer prices) and Friday (import prices).

Growth vs. Value

The change in economic outlook could impact the stock market. Investors have already seen a few swings between growth stocks and value stocks since coronavirus hit last year. Here’s how it often plays out:

  • When the pandemic worsens, traders look for a weaker economy: less travel, less eating out and less employment. They embrace e-commerce stocks, software and technology. Those sectors also benefit from the slow economy dragging down interest rates.
  • When the pandemic eases, traders look for a strong economy. That benefits financials (which profit from higher rates and fewer defaults), industrials and traditional retailers.
SPDR Materials ETF (XLB), with key events. Notice recent breakout above 50-day moving average.

Metal stocks like steelmakers are among the biggest gainers so far. This group has been neglected for years, but now they’re recovering as prices and demand rise. They could also get a boost from the infrastructure bill in Congress. Additionally, Chinese competition is falling as Beijing looks to reduce pollution from steel mills.

Retailers could be another area to watch because they’re the last major industry to report earnings. The next few weeks will feature results from companies like Target (TGT), Foot Locker (FL) and Dick’s Sporting Goods (DKS). Monthly retail sales are also due on Tuesday, August 17.

In conclusion, the market could be on the verge of another rotation as economic numbers improve and central bankers turn hawkish. Keep reading Market Insights for more on the stocks and sectors that could benefit.

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