One of the great things about Bloomberg is that we are free to speak our minds. Debate is encouraged. So I spent much of Tuesday in a lengthy Twitter debate with my colleague Kriti Gupta on the subject of whether what happened on global stock markets was a rotation. I argued yesterday that it was. Kriti argued Tuesday morning that it wasn’t. Her opening salvos went as follows:
Quick thing: a rotation must be sustained. Saying "investors are rotating into cyclicals"...they're not yet! They could be, but one day does not a rotation make. That phrase should be used in retrospect.
While I'm at it — June/September weren't rotations either despite it being called that at the time. Because if tech outperforms on virus risk in a few days again, you can't say we had a one or two-day rotation. That's not a rotation. That's trading!
Most of our disagreement was definitional. I don’t see another word to describe what happened in markets Monday. Here is Capital Economics’ summary of how sectors performed before Monday, and on the day:
A day like this may indeed just be trading, but it’s still the kind that causes a dramatic rotation. However, Kriti makes the valuable point that there is a difference between rotations that are soon reversed as news flows in (maybe you could call them reversals), and the big rotations, involving broader asset classes, that align with underlying changes in the macro environment. For example, people have been waiting for the Great Rotation (with capital letters) out of bonds and into stocks for at least as long as I have been covering markets.
Kriti is unquestionably right that we don’t yet know if Monday’s extraordinary market convulsion is the beginning of a wider rotation. She’s also right that we can only know for sure with hindsight. But it would still help to know if we are at the beginning of that process. So let’s examine the issue.
Fangs
The extraordinary strength of the FANG internet platform stocks had much to do with the violence of Monday’s moves. They already had one big, abortive sell-off in early September, and were widely recognized as a crowded trade. This chart is from Harry Colvin of Longview Economics in London, and shows the results of the latest survey of global fund managers by BofA Securities Inc.:
The FANGs certainly made up a huge part of the selling action in the first two days of this week. In an email, Jim Paulsen of Leuthold Group made the following points: