Perhaps you have noticed the spike in stock market volatility recently. The Dow Jones industrial average has moved up or down by 100 points over the past five consecutive trading days, and 11 of the past 15 trading days.
What on earth could it mean? According to Savita Subramanian, equity and quant strategist at Bank of America, the rise in volatility could mean that the stock market is signalling a change in leadership, as yesterday’s winners give way to a new batch.
This sort of rotation happened in 2000, when technology stocks ceded leadership. In 2007, credit-sensitive stocks fell by the wayside. And in 2010, low-quality stocks ended their strong run. Now, Ms. Subramanian believes that there isn’t just one rotation in the works, but four of them.
1. From high dividend yield into dividend growth: The strategy of pursuing high-yielding dividend stocks has shifted from a Top 10 strategy earlier in the year to the worst in May. “But dividend growth stocks have outperformed,” Ms. Subramanian said, “and may be a better hedge against rising rates.”
2. From domestic to globally diversified: Stocks that are exposed to the U.S. economy have done well this year, as investors see any play on the domestic economy as a defensive play. That’s changing: Now, foreign-exposed U.S. stocks are moving from laggards to leaders.
3. From secular to cyclical growth: Stocks exposed to humdrum secular growth did well when the economy was merely plodding along. However, cyclical stocks that are sensitive to gains in gross domestic product are starting to discount an economic rebound later this year.
4. From low-price beta to low fundamental beta: Ms. Subramanian argues that earlier in the year, investors had equated low-beta – or stocks that tend to be less volatile than the broad market – with safety. “But these stocks have underperformed since mid-April,” Ms. Subramanian said. However, “cyclical, higher-beta stocks that actually have lower earnings volatility have begun to outperform as investors may be more appropriately discounting fundamental risk.”