Leadership is an important consideration in any type of market, bull or bear. When market leadership is thin and quickly changes direction, it can signal a shift in the tone of the overall market.
The rally that has unfolded in recent months has been changing in character. Originally, the thrust began as a reflation trade, as signs of disinflation/deflation began to fade and global bond yields crept higher. The timing of this coincided with the election, which brought with it hopes of tax cuts, deregulation, and infrastructure spending. This boosted the prospects (and share prices) of cyclical companies – those that need an improving economy to do well.
But then both of these narratives began to fade. Inflation and economic data weakened, and it caused bond yields to fall from their highs near 2.6% to current levels around 2.2%. At the same time, it became clear that very little on Trump’s agenda could be counted on … at least for now.
This led to another shift in leadership, as technology stocks took over the show.
Most tech firms, at least those that have been leading the way higher, are secular growth stories. This means that these firms don’t need a robust economy to do well. Instead, the products and services they sell are so unique that they’re almost always in demand.
This post was published at FinancialSense on 06/12/2017.
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