Stocks were mixed Tuesday because investors took profits in value stocks, which have seen a massive runup as the economy recovers.
Dow Jones Industrial Average
fell 127.51 points, or 0.39%, to close at 32,825.95. The
slipped 6.23 points, or 0.16%, to end at 3,962.71, while the
rose 11.86 points, or 0.09%, to close at 13,471.57. The biggest gainer on the S&P 500 was
(ticker: FOXA), Rupert Murdoch’s TV group, which saw shares rose 3.5%.
Stocks repeated Monday’s growth outperformance.
Value stocks, which typically include mature companies in their earnings prime, paused their recent rally. Banks, energy, and industrial stocks saw investors cash out, with the
SPDR S&P Bank
ETF (KBE), the
Energy Select Sector SPDR
Fund (XLE), and the
Industrial Select Sector SPDR
Fund (XLI) falling 1.3%, 2.9%, and 1.4%, respectively. Year to date, all of those funds are up double digits in percentage terms, outstripping the S&P 500’s 5.5% gain. Data from Bank of America strategists show investors are weighting their portfolios more heavily toward banks and industrials, compared with the historical baseline. Investors are betting big on those stocks as Covid-19 vaccine doses are being administered at a rapid pace, allowing states to reopen. Jobs are coming back and consumers have a mountain of cash to spend because of fiscal stimulus.
Now, the cyclical trade seems exhausted for the near term. “When should I sell my cyclical stocks?” was a question a client asked analysts at DataTrek, and Nicholas Colas, co-founder of the firm, wrote in a Tuesday morning note that it was “a logical question.”
Unsurprisingly, shares of growth companies, which are less tied to the near-term economic outlook, outperformed value Tuesday, with the Vanguard S&P 500 Growth Index Fund ETF (VOOG) up 0.35%. One factor that lifted growth was that the 10-year Treasury yield stopped surging, and remained at 1.61% for the second straight day. The yield has spiked this year on expectations of higher inflation and economic demand and a pause in its move higher also reflects a pause in the market’s pricing in of a firming economy, giving the all-clear for growth stocks to power ahead. Steaming giant
(NFLX), for example, saw shares rise 0.7%.
Don’t count value out, yet, though, especially since they seem cheap relative to growth. The gap between price-to-earnings multiples of the two sectors has narrowed, but still remains wider than what has been typical after the financial crisis, according to data from Evercore strategists. Value stocks can keep riding the earnings momentum brought on by the recovering economy.
Arthur Weise, chief investment officer of Kingsland Growth Advisors, told Barron’s that growth “is cooling off, value is heating up.” A general rotation into value is still underway and “could be a three- to six-month phenomenon,” he added.
February retail sales fell 3% month over month, but Citigroup economists weren’t concerned by the data. “The decline in February retail sales is not concerning given the large spending increase in January, the still well-above pre-pandemic level of goods spending,” they wrote in a note. But that didn’t boost consumer-discretionary names, as restaurant chains took a hit Tuesday. Shares of
Dine Brands Global
(DIN), iHop owner, and Outback Steakhouse parent
(BLMN), fell 2.5% and 3.2% respectively. In any case, both stocks are still sitting on year-to-date gains of more than 40%.