One of the themes we have been discussing with clients over the past few months is the potential implications of a gradual reopening of the economy and continued fiscal stimulus on the major equity indices. The wide assumption was that this “reopening theme” would be a positive for stock indices, since it is clearly a positive for the economy; but our view has been a bit more nuanced, in the sense that the “reopening trade” would be good for some stocks, but not necessarily all stocks. The reason being — that as the economy gradually reopened, consumers’ spending habits are going to shift away from things like online shopping, and more towards experiences, such as travel and concerts. So far, we have started to see some of this play out, both in the economy and within markets.
Consistent with the above, tech companies have underperformed more cyclically oriented assets, such as energy, by a significant degree since the beginning of the year. Historically, an equity rotation beneath the surface of an equity index like the S&P 500 might not be all that visible, but recall that technology companies had become such a large part of major market-cap weighted indices like the S&P 500, that even though certain sectors like energy have been rallying, the overall index has fallen modestly over the past few weeks, because the rotation away from tech stocks and towards more cyclically oriented assets has resulted in a net-negative for the overall index. We expect this process to continue in fits and starts over the next several years, which is why proper portfolio diversification will be key to striving to maintain strong risk-adjusted returns over time.