After a year of record highs, the U.S. stock market is undergoing a major shift out of so-called momentum plays and into cyclical companies tied to commodities and primary industries. As recent trading patterns have shown, the rotation could leave information technology and defensive sectors on the outs of investor portfolios.
So far, defensive stocks have lagged the most.
Sector Rotation: What It Is
In the investment world, sector rotation is the process of shifting assets from one industry vertical to another. The process is triggered by investors and portfolio managers who foresee changes in the economic cycle, which could impact everything from business profitability to commodity prices and up to monetary policy.
Sector rotation reflects a change in the market cycle, which is usually well ahead of the economic cycle.
When sector rotations occur, stock-market leaders often turn into laggards and momentum plays lose out to cyclical stocks with higher volatility. All of this is just another attempt to beat the market.
Sector Rotation Underway?
The start of September has seen a dramatic shift away from defensive stocks into banks, transports, energy and retail. Information technology has been caught somewhere in the middle, but if the trend continues, will likely fall in the same bucket as the laggards.
Technology stocks are being pressured not only by rotation, but by regulatory concerns tied to industry stalwarts Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB). Semiconductors – a major component of the IT universe – have been under pressure all year long by mounting U.S.-China trade tensions.
Several analysts have chimed in on the apparent shift in market sentiment. According to CNBC’s Jim Cramer, even tech outperformers are “being swept up in a wave of selling.”
So far, technology has fared better than consumer staples, utilities, and real estate investment trusts.
Should You Buy Technology Stocks?
Sector rotations aren’t unique to Wall Street, and they shouldn’t preclude investors from dabbling in technology or other adversely affected industries. They do warrant a shift in strategy, though.
According to Goldman Sachs, service-oriented technology companies are still likely to perform well under current market conditions. That means businesses with strong recurring revenue in the form of subscriptions and software-as-a-service. “Visible revenue growth” is something investors need to prioritize if they want to increase their exposure to the sector.
There’s a lot more than just sector rotation investors need to be worried about. Monetary policy, global economy, and trade wars are the major catalysts driving market sentiment in 2019. Markets tend to move up and down in unison due to changes in the macro picture.