Stock Market Behavior Trends

Stock market behavior and the divergent performance between the Dow Jones Industrial Average and the NASDAQ market index. It has not been uncommon for the correlation between the two to be -1 or to move in the opposite direction. 

The NASDAQ consists of mostly technology, biotech, and other "growth" stocks whereas the DJ industrial average consists of manufacturing, industrial, energy, consumer non-durables, pharmaceutical companies, or more in the "value" silo. As the economy revs up we are seeing prices increasing (headlines this weekend: all prices are going up-inflation increase?), consumer spending increased dramatically with 1st quarter GDP growth up 6.5%, growth stocks that thrive on low-interest rates and that manufacture little are seeing their valuations reduced.

This is happening because markets are forward-looking and even though earnings reports for the 1st quarter at growth companies are good, outlooks are more uncertain. We are experiencing what is called “sector rotation”. As the economy moves through the business cycle, different sectors of the stock market are impacted. However, investors who try to anticipate these sector rotations do not necessarily outperform the more broad-based indexes over time. Sector rotation funds tend to be more risky, aggressive, and volatile than more broad-based index funds.

In order for the economy to grow sufficiently to come anywhere near reducing the current deficit, a key factor is productivity growth. A quadrupling of the productivity rate to 2% from the anemic productivity increases in the 5 years before Covid-19 at .5 would have led to a substantial increase in GDP growth rates in the longer term. Productivity increases can take time to work through the economy. However, rapid productivity growth is not unprecedented. It would almost exactly match that of the US business sector between 1996 and 2004, the so-called New Economy years when innovative digital processes were adopted in wholesaling, retailing, and finance. (Will the Productivity Revolution be Postponed, Project Syndicate, Barry Eichengreen, 5/10/2021). 

Out of the pandemic, productivity gains are lumpier and isolated. For instance, the world of work at home has allowed office workers to spend less time commuting and more time working. Efforts to automate certain production activities such as meatpacking and online retail activity, the increase in Tele-health offerings, have added to efficiency, cost reduction, and innovation. On the downside is the fact that the beneficiaries of these efficiencies tend to be the large companies with small businesses falling behind and ceding business to the behemoths. Other productivity improvements like in biotechnology will take longer to bear fruit. Also hindering productivity growth is the need for social distancing and sanitation costs. As always, there are both gains and losses in a crisis. However, the pandemic has aggravated many of the inequities that are rising to the top of divisiveness and division.

Vaccinations have continued to progress with the FDA recently approving the Pfizer vaccine for children as young as age 12. 2021, while it has had its own challenges, we’ve been making progress in getting to the other side of the pandemic.

 

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