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.
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