With the current news flow, it’s hard to tell exactly what’s driving the global markets’ moves. There is a lot going on! It’s one of the best earnings seasons in history. U.S. inflation is surprisingly strong. The Fed is openly discussing when to rein in stimulus. But the blanket explanation for just about everything happening in the market this year is COVID-19.
2020 will be known as the pandemic year, but COVID-19 is still around and driving 2021, too. New COVID-19 cases, driven by the rapidly spreading Delta variant, seem to be driving the stock market’s rotation this year in relative performance of sectors, styles and countries.
Economically sensitive, or cyclical, stocks have outperformed when the global case count declined and the defensive, lockdown-era leaders outperformed when cases climbed.
For investors, this pattern implies that until the COVID-19 case count gets back under control, the yen may strengthen, the U.K. yield curve may flatten, and defensive lockdown-era leaders in the stock market may continue to outperform.
Consensus on when the virus may be contained is elusive. If you believe it may take a year or more before cases begin to retreat, then seeking defensive might make sense. But if you believe that the cases may soon be under control, then focusing your strategy on cyclicals may be more attractive. As it applies to the rest of the year, experts believe that the global economic expansion will not be derailed by COVID-19. But in the near-term, they cannot dismiss its effect on the global market.
What’s the best action if you don’t know what will happen next? Financial advisors offer a simple solution: diversify! Many different types of stocks are making new all-time highs, but they are not moving in sync with each other. It can be great news for diversified investors. New all-time highs have been reached in the past month or two for U.S. stocks, European stocks, all non-U.S. stocks, growth stocks and value stocks.
When different types of stocks in a portfolio move out of sync with each other, it can lower the overall portfolio volatility because some zig while others zag on their way higher. Historically, stocks have tended to move together, and have a high degree of correlation. Today, U.S. and international stocks are moving out of sync with each other to a degree not seen in many years. It’s very rare to see a negative correlation, but it can be a positive for diversified investors.