There’s a shift that has been happening in the stock market lately.
The growth stocks that investors have piled into over the past several years are now being ditched for much more stable stocks.
Such a shift is indicative of the pessimism that plagued the market this summer, and for now it seems winners have become losers and the stocks to buy now are those names that have been less-loved.
Growth names like Adobe (NASDAQ: ADBE), Intuit (NASDAQ: INTU), Microsoft (NASDAQ: MSFT), and PayPal (NASDAQ: PYPL) have all traded down this week—Microsoft is down -2%, Adobe is down -3%, PayPal has dropped -4%, and Intuit has sunk -8%—after double-digit gains so far this year.
Meanwhile, big banks like JPMorgan (NYSE: JPM) and Bank of America (NYSE: BAC), as well as cyclical names like Caterpillar (NYSE: CAT) and Deere (NYSE: DE) have all been surging higher this week. JPMorgan and Deere are both up 4%, Bank of America is up 5%, and Caterpillar is up 7% as of Thursday’s close.
Investors have been snapping up those stocks with the lowest price-to-earnings ratios, while many of the most expensive companies in terms of PE are being sold off as sentiment has shifted amid signs of improving conditions between the U.S. and China as the countries near their next in-person trade negotiations. Interest rates have been climbing for the same reason and there are some investors who are betting Treasury yields have finally bottomed for now.
“You had everyone piling into the software names because they were a great place to hide during the trade war,” said Christian Fromhertz, CEO of The Tribeca Trade Group. “Now they are talking about making some strides. Again, people are not optimistic for the most part on them getting anything done, but as headlines come out… there is a mad rush out of the safety areas of the market.”
UBS’ Art Cashin said the move away from pricier stocks has the markings of an asset reallocation trade. “It may be as simple as taking profits on things that move and investing in others, hoping we’d get closer to a trade deal,” Cashin said. “That may be part of what you’re seeing.”
National Securities’ chief market strategist, Art Hogan, has a slightly different take. Hogan believes the rotation out of growth and into value stocks appears to be tied to the idea that, for now, interest rates have bottomed. In August, Treasury yields hit record and multi-year lows, with the 10-year yield dropping as low as 1.42%. The 10-year yield is currently at 1.784%.
“All the stuff in the middle has started to outperform,” Hogan said. “The momentum trade and the defensive trade is unwinding. It feels like it’s been triggered because yields have bottomed. That low on the U.S. 10-year feels like an overshoot.”
Fundstrat technical strategist Robert Sluymer said, “With low growth, weaker economic backdrop, there are two types of names you want to own. One is secular growth, which is less cyclical, like Mastercard (NYSE: MA) or Microsoft. As soon as rates start to stabilize, the valuations around them can be ratcheted down pretty quickly.”
“I think secular growth is still longer term leadership, but there’s a rotation away from a lot of the bond proxies to the cyclical side of the market,” Sluymer continued. “A lot of those cyclicals, whether it’s Caterpillar or Eaton (NYSE: ETN), they peaked at the end of 2017 and the beginning of 2018. They’ve been declining ever since. The prices have been bottoming for probable two or three months, but those longer term momentum indicators are turning positive. We would recommend trimming bond proxies and adding to cyclicals.”