Market Insights

This post, originally published on September 19, is is part of a series about the catalysts for stock movements. Sign up for TradeStation’s Master Class learning sessions next week for the complete course.

Anyone who’s been in the market for a while will notice that stocks don’t always move based on fundamentals. Good news may be ignored and vice versa. One big reason for that is the driver of investor rotation.

Today’s a good time to study this because rotation seems to be taking place before our eyes: money shifting from high-multiple growth stocks into lower-multiple value stocks.

Financial stocks, for example, currently trade at less than 13 times estimated forward earnings. Materials, industrials and energy are valued around 15-16 times. All of those sectors are up at least 2 percent in the last week. Meanwhile technology (19 times forward earnings) and consumer discretionary (21 times) have edged lower.

Rotations like this can last varying amounts of time, and usually have deeper causes.

The main cause right now seems to be rising interest rates, which makes higher-multiple stocks less valuable.

Another reason is a perception that trade tensions between the U.S. and China will improve. That’s giving investors confidence to buy stocks like Boeing (BA) and Caterpillar (CAT) that do business overseas. It’s also indirectly positive for materials and energy, which sell into global markets.

In some ways this rotation is similar to a process that began around 2003, when investors sought exposure to faster growth and higher interest rates in China and Europe. That trend expressed itself in a weak dollar, soaring commodity prices and huge gains for emerging-market indexes.

Just the opposite thing has been the case for most of this decade. Fortunately for market bulls, Silicon Valley provided an army of stocks driven by innovation instead of raw economic expansion: Facebook (FB), Nvidia (NVDA) and Netflix (NFLX), to name a few.

Another thing to remember about these kinds of investor rotations is that the underlying reasons may be true for several quarters before they’re expressed in stock prices. For example, industrial growth has been accelerating in the U.S. all year. Ditto for the apparently value of financials stocks.

But then, something causes the logjam to break. Last decade’s emerging-market boom, for instance, followed the SARs epidemic and Brazil’s decision not to default on its bonds. This decade’s tech boom was aided by the Federal Reserve’s super-low interest rates.

Right now, the tide may be turning again. Money has have been highly concentrated in technology all year. Some companies in the sector, especially FB, NFLX and semiconductors, have reported less-than-stellar numbers recently. Meanwhile, investors are starting to find value in other, long-neglected, areas.