CIO casts eye over rapid rotation and says correction may have already happened, just in individual sectors
The year to date has been a bit like pick-n-mix candy – there’s been something for everyone but some of it has tasted better than others.
Greg Taylor, CIO at Purpose Investment, believes investors should expect a bumpier journey than last year’s post-March rally as uncertain continues to reign. Recently, a “family office” with billions of dollars of leverage blew up, while the GameStop saga continues.
He predicted that the move in rates, however, will be the story for the rest of the year. Questions persist over whether we will get a taper tantrum 2.0 after the Bank of Canada became the first of the G7 central banks to announce a scaling back of their quantitative easing programs. How far behind is the FOMC and can Jay Powell do enough to signal these moves in advance so the market is ready for them? Time will tell.
Taylor said: “In times of rapid-sector rotation, rotating corrections, and uncertainty, one of the best strategies is to remain active. If taken advantage of, volatility can equal opportunity. The amount of stimulus in the system should keep this rally going longer than everyone expects, but it won’t be as smooth as most of last year. Buckle up and get ready for the ride.”
That rotation has been rapid and severe, making security selection more important, and bonds harder to make money in. For example, tech stocks began the year on fire but after peaking in mid-February, the sector has fallen out of favour. Taylor said that trendy ARKK funds — the poster children for this tech theme — are down 30% from their peak in only a few weeks.
Many blame the bond market. As yields move higher with economic optimism, we are seeing a return of the “value” factor, whic is when investors will pay up for growth when growth is scarce. However, with stimulus flows to the economy at unprecedented levels, many new parts of the market are experiencing rapid demand growth, causing a rotation towards the cyclicals.
One of the winners has been energy. Taylor explained: “For the first time in years, energy was the best performing sector this quarter for the S&P 500. The sector had been written off as dead so much so that one of the oldest companies in North America, Exxon Mobil, was kicked out of the Dow Jones Industrial Average last year.
“Don’t look now, but after energy investment suffered for years, there are concerns energy supply won’t be able to meet the demand of pent-up families hitting the road for a vacation this summer," he said. "This has led to many E&P companies gaining over 50% in the quarter.”
He added that while many are calling for a correction, we may have already had it. “It just happened in individual sectors, one at a time,” Taylor said. “Rolling corrections are healthy. Broader markets remain close to all-time highs, partly a result of stimulus cash. Overall, we see potential for very rapid economic growth in the near term.”
