Key Points

  • Major indices have climbed higher this year, but not without large and swift shifts in leadership among sectors.

  • Pockets of speculative excess—building since the market’s low in March 2020—have started to lose steam, but that hasn’t (thus far) translated into serious declines for the broader market.

  • Some valuation metrics are near or above levels seen during the early-2000s tech bust, but there are healthier underlying fundamentals this time around.

As Shakespeare might put it, “full of sound and fury, signifying nothing” is perhaps an apt way to describe the character of the market so far this year. In a broad sense, performance among the major averages has been healthy, with all in positive territory year-to-date. However, large and swift shifts in sector leadership—along with considerable speculation in certain pockets of the market—have kept things more interesting beneath the surface. Today’s report looks at those behind-the-scenes dynamics, the marked recent weakness in speculative pockets of the market, and how that hasn’t (thus far) translated into broader equity market weakness.

Last November marked a turning point for the market in terms of leadership. Given the positive results from several COVID-19 vaccine manufacturers and the subsequent pickup in inoculations, we saw a decisive shift away from the pandemic/haven trade and toward the reopening/cyclical trade. To put index “labels” on them, the former was generally characterized by the NASDAQ (the leader in 2020), while the latter by the Russell 2000 (the laggard in 2020). The churn has at times—particularly in the past few weeks—been incredibly volatile, with the aforementioned groups trading places at both the top and bottom of the performance spectrum on a day-by-day basis. That said, since last November, the reopening/cyclical trade (mainly Energy and Financials) has remained intact and led the market higher; while areas like Technology and Consumer Discretionary (outperformers during the depths of the crisis) have taken a backseat. But it’s the more speculative areas of the market that have taken the biggest hits.

Hunting for a “bargain” no longer a bargain

A dominant area of the market in which speculation was rampant earlier this year was in low-priced stocks. Stocks with the lowest share prices saw massive gains which, perhaps not coincidentally, coincided with the surge in heavily-shorted stocks (GameStop being the posterchild). As you can see in the chart below, the bias towards low-priced stocks paid off handsomely into mid-February, while higher-priced stocks had more muted relative performance.