A Study of Sector Rotation during year 2021 [Market Rotation]
Sector Rotation Analysis starting from Jan 2021
While 2020 was a wonderful year for many investors, 2021 has been riddled with changes in the stock market thus far. In this analysis, I compared multiple ETFs that track different specific sectors in the market in order to visualize these changes. The periods and commentary are broken down month by month with the sector leaders and losers of that month.
A little about Sector Rotation:
Sector rotation in the market tends to follow the stages of business cycle—recovery, expansion, slowdown and recession.
Recovery
During the Recovery stage, feds will keep interest rates low while long-term rates rise. The material, financial, and industrial sector tends to take the lead during this phase.
Expansion
During the Expansion stage, the economy will expand at a stable pace while fed take a neutral stance on rates but credit conditions will ease. Again, long-term rates increase. Financials, Industrials, Technology, and Consumer Discretionary sectors will excel in this phase.
Slowdown
During the Slowdown phase, the economy peaks then starts to stagnate as inflation grows. At this point, credit conditions will be strained and stocks may fall. The sectors that do best in this phase are Consumer Staples, Energy, Health Care, and Materials.
Recession
During a Recession, the economy shrinks and feds cut rates. Long term rates decrease. Healthcare, Utilities, and Consumer Staples will do best in this phase.
2021 Sector Rotation Commentary
During January, we tested all-time highs for the most part. Several events that occurred were the Senate run-off, the inauguration of President Joe Biden, and even the GameStop Frenzy. In world news, the number of Covid-19 cases were spiking and investors were optimistic that the vaccine would become available and help open the economy back up. Chair of the Federal Reserve, Powell pledged that the central bank will leave interest rates near zero. During early January, Energy was king of the sectors but mid-way through was overthrown by Real Estate and Communication Services. The sector losers of January were Energy, Financials, and Materials.
February kicked off Earnings Season and we saw higher-than-anticipated numbers with a lot of companies beating Earnings expectations. One of the main events that occurred during February was the Treasury Yield started increasing significantly, this sent growth and tech stocks plummeting down (as they would be impacted more than established companies with well-balanced sheets and already sustainable revenue). A lot of low to mid cap stocks were significantly impacted by the rising yields and even up to today as I am writing this, still has not recover fully (
FUBO, 
NIO, 
PLTR, 
SPCE). We saw a rotation from growth to value stocks. The Energy sector took reign over Real Estate while Communication Services rose steadily too. The sector losers of February were Materials, Health Care, and Consumer Staples sectors.
Early March was the bottom of the sell-off that started towards the middle of February. Some notable events were the Suez Canal mishap, several banks getting slapped with margin calls worth Millions of dollars due to exposure from Archegos, and the $1.9 Stimulus was finally passed! The stimulus benefited the banks, airlines, and other consumer discretionary stocks so we saw a slight rally in cause of the news. Real Estate, Energy, and Finance continue to lead amongst the other sectors while Technology, Consumer Staples, and Healthcare continued to remain sector losers.
It's Early May now and the market is starting to look both frothy and toppy. You can see a slight decline/curve from all sectors in the most recent period. Earnings Season is still going on but we saw many companies that met or exceeded expectations, sell-off after reporting earnings. We have also seen an increase in the VIX (volatility indicator) as a reaction on several news such as President Joe Biden's proposal to increase tax on corporations as well as the wealthy. The sector leaders today are (1) Energy, (2) Financials, and (3) Real Estate while the Sector Loser goes to Technology.
I hope this analysis is able to give insight on the current market in regards to different sectors. If there's one thing that is apparent in this analysis, it is that the rotation from growth stocks to value stocks continue. While Tech stocks were a favorite during the Covid-19 lockdown, Tech has been overthrown in favor of everyday necessities like Energy and Financials this year.
-Natalie Garces, OptionsSwing Analyst
While 2020 was a wonderful year for many investors, 2021 has been riddled with changes in the stock market thus far. In this analysis, I compared multiple ETFs that track different specific sectors in the market in order to visualize these changes. The periods and commentary are broken down month by month with the sector leaders and losers of that month.
A little about Sector Rotation:
Sector rotation in the market tends to follow the stages of business cycle—recovery, expansion, slowdown and recession.
Recovery
During the Recovery stage, feds will keep interest rates low while long-term rates rise. The material, financial, and industrial sector tends to take the lead during this phase.
Expansion
During the Expansion stage, the economy will expand at a stable pace while fed take a neutral stance on rates but credit conditions will ease. Again, long-term rates increase. Financials, Industrials, Technology, and Consumer Discretionary sectors will excel in this phase.
Slowdown
During the Slowdown phase, the economy peaks then starts to stagnate as inflation grows. At this point, credit conditions will be strained and stocks may fall. The sectors that do best in this phase are Consumer Staples, Energy, Health Care, and Materials.
Recession
During a Recession, the economy shrinks and feds cut rates. Long term rates decrease. Healthcare, Utilities, and Consumer Staples will do best in this phase.
2021 Sector Rotation Commentary
During January, we tested all-time highs for the most part. Several events that occurred were the Senate run-off, the inauguration of President Joe Biden, and even the GameStop Frenzy. In world news, the number of Covid-19 cases were spiking and investors were optimistic that the vaccine would become available and help open the economy back up. Chair of the Federal Reserve, Powell pledged that the central bank will leave interest rates near zero. During early January, Energy was king of the sectors but mid-way through was overthrown by Real Estate and Communication Services. The sector losers of January were Energy, Financials, and Materials.
February kicked off Earnings Season and we saw higher-than-anticipated numbers with a lot of companies beating Earnings expectations. One of the main events that occurred during February was the Treasury Yield started increasing significantly, this sent growth and tech stocks plummeting down (as they would be impacted more than established companies with well-balanced sheets and already sustainable revenue). A lot of low to mid cap stocks were significantly impacted by the rising yields and even up to today as I am writing this, still has not recover fully (
FUBO, NIO, PLTR, SPCE). We saw a rotation from growth to value stocks. The Energy sector took reign over Real Estate while Communication Services rose steadily too. The sector losers of February were Materials, Health Care, and Consumer Staples sectors. Early March was the bottom of the sell-off that started towards the middle of February. Some notable events were the Suez Canal mishap, several banks getting slapped with margin calls worth Millions of dollars due to exposure from Archegos, and the $1.9 Stimulus was finally passed! The stimulus benefited the banks, airlines, and other consumer discretionary stocks so we saw a slight rally in cause of the news. Real Estate, Energy, and Finance continue to lead amongst the other sectors while Technology, Consumer Staples, and Healthcare continued to remain sector losers.
It's Early May now and the market is starting to look both frothy and toppy. You can see a slight decline/curve from all sectors in the most recent period. Earnings Season is still going on but we saw many companies that met or exceeded expectations, sell-off after reporting earnings. We have also seen an increase in the VIX (volatility indicator) as a reaction on several news such as President Joe Biden's proposal to increase tax on corporations as well as the wealthy. The sector leaders today are (1) Energy, (2) Financials, and (3) Real Estate while the Sector Loser goes to Technology.
I hope this analysis is able to give insight on the current market in regards to different sectors. If there's one thing that is apparent in this analysis, it is that the rotation from growth stocks to value stocks continue. While Tech stocks were a favorite during the Covid-19 lockdown, Tech has been overthrown in favor of everyday necessities like Energy and Financials this year.
-Natalie Garces, OptionsSwing Analyst
Education first, profits second.
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