Stocks fell on Tuesday, with the most economically sensitive ones taking the hardest hit. Those so-called cyclical stocks have been hot as of late.
The Dow Jones Industrial Average fell 308.05 points, or 0.9%, to close at 32,423.55. The S&P 500 fell 30.07 points, or 0.8%, to close at 3,910.52 The Nasdaq Composite fell 149.85 points, or 1.1%, to close at 13,227.70. The biggest gainer on the S&P 500 was WEC Energy Group (ticker: WEC), up 4.1%.
Cyclical stocks have had an impressive run so far this year as states have reopened, which has been met with pent-up demand from trillions of dollars in fiscal stimulus. Tuesday, the Energy Select Sector SPDR (XLE), the SPDR S&P Bank (KBE), and the Industrial Select Sector SPDR (XLI) ETFs fell 1.5%, 3%, and 1.8%, respectively.
Investors that have already loaded up on these stocks appear to be taking some profits. A Bank of America survey of fund managers published in mid-March showed that institutional funds are holding a significantly larger portion of their portfolios in industrials, financials, and commodities compared with their historical average allocations. For cyclical names, “this week is some sort of digestion,” said Frank Cappelleri, Instinet’s chief market technician.
Shares of growth companies, mostly in the technology sector, outperformed on Tuesday as the 10-year Treasury yield tumbled to 1.63%. It touched 1.76% a few days ago. Lower rates are particularly positive for growth valuations because those companies expect to see a larger chunk of their profits in the future, making the value of those profits more comparable to long-term interest rates. The Vanguard S&P 500 Growth ETF (VOOG) fell 0.2%, outperforming its value counterpart (VOOV), which fell 1.3%. Amazon.com (AMZN), for example, rose 1%.
In fact, a net $3.2 billion flowed into U.S. tech stock funds last week, the largest inflow of all U.S. sectors, according to Bank of America. Meanwhile, more than $1 billion flowed out of energy funds. That signifies investors’ recent preference to add exposure to growth stocks. And tech stocks began Tuesday solidly in the green, even though many fell by the end of Tuesday’s trading. Macro factors, combined with “end-of-quarter positioning, are helping tech to rebound and relatively outperform over the past few days,” wrote Tom Essaye, founder of Seven’s Report Research, in a note.
This doesn’t mean it’s time to dump cyclicals. Those have plenty of earnings momentum on their side.
Write to Jacob Sonenshine at [email protected]
