Market Sector Rotation is happening now. Every so often, investor preferences undergo a seismic shift. What’s hot tomorrow can be a far cry from what was hot yesterday. We’re not talking about selling “Company A” stock to buy “Company B” stock. As investment managers, we seldom get involved with individual stock issues. The market is just too fickle to predict with any confidence the coming success of any individual company stock.

The huge (worldwide) stock markets are divided into numerous sectors. At any moment, some sectors are coveted by investors, and lively buying causes increasing stock prices. At the same time, out-of-favor sectors experience heavy selling, and stock prices trend lower. These preferences are not fixed, but change over time, causing Sector Rotation to occur.

For an example of shifting preferences and sector rotation, Technology is one of the best and most dramatic examples. Investors have experienced several decades of love/hate relationships with Technology. In the 1990s, the newly available Internet created demand for Technology stocks. The NASDAQ Composite Index (where many Tech Companies’ stocks are listed) rose from the low 400 range to 5,048 in March of 2000.

When the “Dot-Com Bubble” burst in March of 2000, rotation out of Technology began. By September of 2002, the NASDAQ Index fell to under 1,150. An unbelievable 15 years later (2017), the NASDAQ Index reached a new high closing value, and the popularity of Technology soared. For a while, anyway.

Bonds exhibit another classic example. Following a solid performance in 2020 (+7.5% Aggregate Bond Index change), performance for the next 2 years was negative, -1.5% and -13.0%, respectively. Many investors and advisors dramatically reduced their portfolios’ bond component, rotating into other, more popular, sectors of the market, including Money Market Funds.

In recent years, Money Market mutual funds have become popular due to rising interest rates. Low risk with relatively high returns can’t last forever, and sure enough, rates have begun to fall. Money Market investors are rotating out, again finding favor in the Bond Sector.

Today’s portfolios are experiencing Sector Rotation, as Technology, Money Markets, and other sectors are losing favor, while Industrials, Materials, and International Stocks are among those gathering interest. Multitudes of buyers are causing rising stock prices in these and other preferred sectors.

Watching and understanding national trends enables investors to implement Sector Rotation while maintaining overall portfolio balance and diversification. We can help. Each and every Saturday, we relate the latest news in sector preference shifts during the Van Wie Financial Hour on WBOB radio.