PRU Prudential Financial Inc

By Karen Langley 

Stock-market laggards like small-caps and industrial shares have surged in August, an encouraging sign that the market's breadth is widening after months of dominance by big technology companies.

The S&P 500 is flirting with record levels, up 4.4% this year, driven largely by outsize gains in megacap tech stocks like Amazon.com Inc. and Apple Inc. Shares of both companies have climbed more than 50% in 2020.

Recent strides by economically sensitive groups like energy and financial stocks that were battered along with industrial shares during this year's market turmoil have added to hopes for a continued rally. Their gains have also helped ease worries among some investors who feared a market dominated by a subset of stocks could be vulnerable to sudden reversals.

Among the biggest winners in the stock market in August have been FedEx Corp., Halliburton Co. and Prudential Financial Inc., all of which have risen at least 11%.

"There's just no question that a healthier market has broader support in it," said David Bahnsen, chief investment officer of The Bahnsen Group, a wealth-management firm. "If you're getting a good price movement on your index, but it's all coming from just a few names, that is by definition less sustainable."

The S&P 500 has been led in August by the industrial sector, up 8%, and the energy group, up 5.5% -- two groups that are still in the red for the year. In comparison, the technology sector has advanced 3% -- in line with the 3.1% gain logged by the index as a whole.

Elsewhere, the Dow Jones Transportation Average, which tracks the performance of airlines, railroads and trucking companies, has surged 9.7% this month, erasing its losses for the year. Starting in late July, the transports logged an 11-day winning streak, their longest since March 2010, according to Dow Jones Market Data.

And the Russell 2000 index of small-capitalization companies, whose prospects are often tied to domestic growth, has advanced 6.6% this month. Economically sensitive stocks like industrials and financials have a heftier weighting in the small-cap index.

"I do think investors are starting to look beyond the shiny objects," said Rich Steinberg, chief market strategist at The Colony Group, a financial advisory firm. As of late, he said: "They're chasing the dull objects, hoping that they get shiny over time."

The rally in cyclical stocks coincides with signs of economic recovery in the midst of the continuing coronavirus pandemic. Weekly unemployment claims recently fell below one million for the first time since the pandemic struck in March. U.S. consumer prices have risen along with demand, and factories across the U.S., Europe and parts of Asia have increased production.

Although corporate earnings fell sharply in the second quarter from a year earlier, the pain for most companies was less severe than analysts had feared. More than 80% of the S&P 500 companies that have posted earnings beat expectations, according to FactSet.

Gains among shares of transport stocks are often seen as a positive signal for the broader market, as companies that haul goods, materials and people keep the economy moving. Shares of all 20 companies in the index have risen in August, led by a 24% gain by FedEx.

Rival United Parcel Service Inc. is up 13% this month. On an earnings call in late July, Chief Executive Carol Tomé said the company experienced record volume levels as consumers sheltered in place and stores kept their doors closed.

"At the beginning of the second quarter, we assumed demand would slow," she said. "Instead, we saw just the opposite."

The company has also said it plans to impose fees on large shippers during the holiday season, further buoying its shares.

The leg higher by the Russell 2000 index has been a welcome change for small-cap investors, who watched the benchmark plunge 42% from its January high to its March low. Companies in the small-cap category, which typically have a market value of about $2 billion or less, tend to be more sensitive to downturns than larger corporations but can post big gains when the economy starts to improve.

AMC Entertainment Holdings Inc., for one, jumped 14% Thursday after saying it would open more than 100 movie theaters this coming week. The stock has gained 37% this month.

It is unclear whether the recent outperformance by industrials, small-caps and other cyclical groups will persist. The Dow transports snapped their winning streak Thursday and small-caps slipped, while the S&P 500's technology sector and its communication-services group -- with help from heavy hitters Alphabet Inc. and Facebook Inc. -- were its only segments to eke out gains.

"The test right now is to determine, is it time to rotate into more of a broad participatory strategy that isn't just driven by tech," said Eric Freedman, chief investment officer at U.S. Bank Wealth Management, which has been trimming its overweight position in U.S. large-cap technology stocks.

In recent days, the firm sold most of its position in some client portfolios in the technology-heavy Nasdaq-100 index and bought the broader-based S&P 500.

"We want to have more of that exposure because we do think there are some consumer-friendly catalysts that could emerge later this year," Mr. Freedman said. He pointed to hopes for progress on a coronavirus vaccine and anticipation of a dovish message from the Federal Reserve at its September meeting.

Write to Karen Langley at karen.langley@wsj.com

(END) Dow Jones Newswires

August 16, 2020 12:14 ET (16:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.