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Investors had a plan going into today’s big meeting with China, and they stuck to it.
Economically sensitive stocks like banks, materials and industrials led the rally on Friday. Semiconductors and Chinese Internet stocks also had some of their bigger gains in recent months.
The change is a potential reversal of a market trend that began 11 months ago when the Federal Reserve turned dovish. Interest rates fell as the global economy slowed. Investors responded by shifting to utility stocks, real-estate investment trusts, bonds and gold.
But now the pendulum is swinging in the opposite direction, causing investors to favor very different companies. The new sectors will benefit from faster growth and higher interest rates. A stronger economy, after all, means more construction, more machinery and more shopping. And because businesses borrow money when they’re growing, it means more lending and financial services.
Semiconductors have a double appeal. One is their huge reliance on customers in China and Asia. The other is their link to the economic cycle. The Philadelphia Semiconductor Index ($SOX) is barely 2 percent from its all-time highs and has formed a potential bullish ascending triangle. Advanced Micro Devices (AMD) was the top-performing individual name.
Chinese Internet stocks like Alibaba (BABA), Baozun (BZUN) and JD.com (JD) also shot higher. This entire group, tracked by the Golden Dragon Index ($HXC), has squeezed into an increasingly tight range all year. It was one of the top-performing major groups in 2017, followed by a huge pullback in the last 18 months. Will money now return to this group?
Gold miners are just the opposite, dropping more than 3 percent. Gold futures (@GC) are also on pace for their biggest weekly decline since March. The metal is still up about 14 percent since the end of May. Will it hold if optimism spreads elsewhere in the market?
Under the deal with China, tariffs planned for October 15 will not take effect. Beijing will let its currency strengthen and allow U.S. financial companies to operate on the Mainland without a Chinese partner. China also seemed to accept surprising terms about intellectual property. Most observers also expect more agricultural exports from the U.S. — especially soybeans (@S).
In conclusion, investors have waited for this trade deal for months. Now that it’s been reached, attention can shift back to more normal issues like earnings and economics. Investors may also want to see whether the rotation to stocks like financials and chips continues.
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