This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Friday, February 24, 2023
What’s old may be new again for U.S. stock investors.
The end of zero-interest rate policies (ZIRP) is likely to mark a shift in equity market favorites from long-leading technology names to sectors like energy, materials and housing — or what strategists at Bank of America deem part of “the old economy.”
“Bear markets have historically resulted in leadership change, which suggests old economy sectors are likely the winners of this cycle,” Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy said in a note earlier this week.
With these components of the market depleted of capital over the past ten years as Big Tech was powered by free money, the “pendulum is expected to swing back” in their direction, Subramanian noted.
Despite the big gains across January in these very stocks that were battered throughout 2022, investors have called the moves higher this year a bear market rally rather than the start of a new bull market.
“I think the stock market is in a protracted bear market,” DoubleLine Capital founder and CEO Jeffrey Gundlach told Yahoo Finance Live in an interview Wednesday (video above), adding it began in the fourth quarter of 2021.
“[It’s] very negative for the stock market when you have rising interest rates against these valuations, especially real interest rates,” Gundlach said, adding a pause in the increase in real rates this fall was a catalyst for the recovery in risk assets. “But it looks like real interest rates might start rising again.”
Meanwhile on Sunday, Morgan Stanley’s Mike Wilson told clients in a not that the recent rally was “a speculative frenzy” based on false hopes for a pivot by the Federal Reserve.
Equity markets are in the throes of a recent shift in the narrative for where interest rates will go, finally taking Fed officials at face value as they vow to lift their policy rate above 5% this year.
Bank of America indicated its analysis of equity risk premium shows growth stocks were not pricing in recession risk and the expected higher-for-longer rate environment is projected to pressure long-duration growth stocks.
Whatever the rest of the year holds for the U.S. stock market, signs have already emerged of an imminent change in leadership.
Last year, the Dow Jones Industrial Average crushed the technology-heavy Nasdaq Composite, for example, falling less than 10% in 2022 while the latter index wiped out more than one third of its value. As Yahoo Finance’s Jared Blikre pointed out, the Dow’s outperformance relative to the tech index was by far the biggest gap since the dot-com bubble in the early 2000s.
Goldman Sachs’s chief U.S. equity strategist David Kostin warned in November that the “exceptionalism of technology is arguably behind us.
In 2022, the aggregate market capitalization of the current “tetrad of largest stocks,” as Goldman Sachs put it — Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL) – fell to 18% from 22% the prior year. And those top four stocks lost an aggregate -25% compared to -13% for the remaining stocks in the index during the period.
“With the end of ZIRP, we see the pendulum swinging back to the old economy as prolonged underinvestment has led to supply issues in the old economy,” Subramanian said.
Bank of America itself raised metals to overweight, and is overweight energy, a testament to its confidence in the leadership transition.
What to Watch Today
8:30 a.m. ET: Personal Income, month-over-month, January (01.0% expected, 0.2% during prior month)
8:30 a.m. ET: Personal Spending, month-over-month, January (1.4% expected, -0.2% during prior month)
8:30 a.m. ET: Real Personal Spending, month-over-month, January (1.1% expected, -0.3% during prior month)
8:30 a.m. ET: PCE Deflator, month-over-month, January (0.5% expected, 0.1% during prior month)
8:30 a.m. ET: PCE Deflator, year-over-year, January (5.0% expected, 5.0% during prior month)
8:30 a.m. ET: PCE Core Deflator, month-over-month, January (0.4% expected, 0.3% during prior month)
8:30 a.m. ET: PCE Core Deflator, year-over-year, January (4.3% expected, 4.4% during prior month)
10:00 a.m. ET: New Home Sales, January (620,000 expected, 616,000 during prior month)
10:00 a.m. ET: New Home Sales, month-over-month, January (0.7% expected, 2.3% during prior month)
10:00 a.m. ET: University of Michigan Consumer Sentiment, February Final (66.4 expected, 66.4 prior)
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance