In the last 30 days, the tech-laden Nasdaq composite index is down 7%. By comparison, the Dow Jones Industrial Index, which is home to more of those traditional old-economy companies, has only lost a modest 3.5%.
Amongst those Dow Jones benchmark shares that have made headway in an otherwise down market include banks, restaurants, integrated oil, and pharmaceuticals. We won’t get more old economy than those.
That has prompted some to ask if a rotation from expensive tech shares into less exciting old economy stocks is taking place?
That is quite possible given that the narrative about interest rates has gone from one that has been fiercely accommodative to one that is more vigilant about inflationary pressures. It is looking increasingly likely that all the assertions about inflation being transitory is now about inflationary pressures being more persistent…
… At the conclusion of the recent two-day policy meeting, the Federal Reserve’s rate-setting committee now think that inflation will run hotter than previously expected this year.
Talking heads have not been backward in coming forward about the need for investors to switch from techs to cyclicals. In other words, they say that it is time to rotate out of the former and into the latter.
We have to wonder if they are merely talking up their own book. Who, we have to ask, is guaranteed to benefit every time we sell one stock and buy another?
Truth is, however, no one — not even market professionals — has a proverbial crystal ball when it comes to spotting sector rotation. If anything, we are dreadful at timing the market.
That is a problem because the cost of getting it wrong can be greater than the benefits of getting it right. We might think that it is easy to swing-trade from one sector that is falling to another that is rising.
We might be lucky with our speculation and get it right once or twice. But we won’t get it right every time. And as Warren Buffett likes to say, speculation is most dangerous when it looks easiest.
A better solution could be to remain properly diversified all the time. That way, we will never be out of the market – not even for a minute – and out of the stocks that we like most.
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David does not own shares in any of the companies mentioned.
