nasdaq S&P 500

This Hasn’t Happened Since 2009…

Boy, oh boy: it certainly looks like the "rotation" trade is in full swing on Monday.

Boy, oh boy: it certainly looks like the “rotation” trade is in full swing on Monday.

Last week, as the odds of the GOP tax bill ultimately becoming law increased, more than a few analysts and commentators renewed calls for a rotation out of 2017’s best performers and into the sectors and names that have suffered (relatively speaking) as markets faded the Trump agenda.

This was on full display last Wednesday when tech stocks nosedived, leading to the worst underperformance versus the broad market since Goldman triggered a tech rout with their infamous FANG note in early June.


A couple of simple charts illustrate the recent shift. Here’s value versus growth:


And have a look at the financials versus info tech:


Goldman touched on all of this late Friday. Here are some excerpts:

Progress towards tax reform resulted in sharp equity market rotations this week. The performance of tax-exposed equities and prediction markets assign a roughly 80% likelihood that tax reform is enacted, in line with our political economist’s view. As we highlighted in our 2018 US Equity Outlook, high tax rate and domestic-facing sectors have the most to gain from corporate tax reform, while low tax sectors such as Info Tech and Health Care stand to benefit the least. This sensitivity was reflected in price action this week, as Telecom (+6.3%) and Financials (+5.0%) outperformed, while Info Tech (-1.4%) lagged. We continue to recommend a neutral weight in Info Tech given limited relative benefits from tax reform,  elevated valuations, and risk of government regulation.

The most popular fund positions have outperformed YTD but suffered during the rotation this week (see Exhibit 2). Our hedge fund VIP basket (GSTHHVIP) is up 25% YTD but trailed the S&P 500 by 275 bp this week due in part to a 40% concentration in Technology stocks. Our mutual fund overweight basket (+26% YTD) fared better, lagging the S&P 500 by just 50 bp due to a greater exposure to small-caps, value stocks, and Financials.


Note that chart in the right pane. See that precipitous decline in the dark blue line? Yeah, that’s due to hedge funds’ overweight in tech (more here). Have a look at the sector tilts relative to 5-year histories:


Well it seems likely the pain will continue, because on Monday, the Nasdaq is woefully underperforming the Dow and the S&P. This is five out the last six sessions now that big-cap tech has been the laggard and as you can see from the following chart, this is easily one of the most acute instances of tech underperformance in quite some time:


In fact, it’s the worst 5-day underperformance since 2009:


Meanwhile, have a look at the Nasdaq VIX decoupling from the “regular” VIX:


Maybe it’s time for hedgies to start rethinking that whole “we’re never going to sell our info tech” thing…




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