New day, same story

Myles Udland
·3 min read

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Tuesday, March 9, 2021

The market's great re-opening trade rotation continues

A new trading week began with the same market story— the re-opening trade continues to rock the markets.

The Nasdaq (^IXIC) finished Monday's trading session officially in correction territory, having lost 11% from its record high on February 12. Meanwhile, the Dow (^DJI) finished up just under 1%. The S&P 500 (^GSPC) split the difference, as tends to be the case.

Index-level performance will help tell some of the market's daily story. But divergences between sectors and styles, as usual, help really illustrate what is driving the markets at inflections points like what we're witnessing right now. And Monday's spread between the regional banks and Cathie Wood's flagship ARK Innovation Fund (ARKK) perfectly captures how investors are positioning right now.

The SPDR Regional Bank ETF (KRE) closed at a record high on Monday. The index gained some 2.6% to start the week as higher rates and faster economic growth are seen as a boon to the bottom line of smaller financial institutions more levered to the domestic economy.

ARKK, meanwhile, fell another 5.8% on Monday and is now down over 30% from its record high hit back in mid-February. Year-to-date, ARKK has now lost over 11%.

And while the longer-term performance of ARKK against the regional banks is no contest — in the last two years ARKK is up over 140% while KRE is up just 27% — the last few weeks of market action have been defined by investors increasing bets on boring regional banks and decreasing bets on the kinds of exciting next-gen plays that made Cathie Wood a star.

But this kind of churn within the market at this point in the economic cycle is not exactly a surprise to some top Wall Street strategists.

"The recent market volatility has been largely a function of a painful underlying market rotation out of high Momentum and expensive Growth stocks as rates and inflation expectations underwent a sharp adjustment," said JPMorgan strategist Dubravko Lakos-Bujas in a recent note to clients. "We see higher rates largely as a function of earlier and stronger than expected economic recovery and supportive of our positive equity outlook."

Mike Wilson, equity strategist at Morgan Stanley, added in a note to clients this weekend that the market's current rotation "should be expected at this stage of a recovery from recession."

"After the big initial surge, the stock market tends to consolidate as interest rates rise and P/Es compress," Wilson adds. "This is why our year-end target of 3,900 for the S&P 500 is toward the lower end of most sell-side strategists. The bull market continues to be under the hood, with value and cyclicals leading the way. Growth stocks can rejoin the party once the valuation correction and repositioning is finished."

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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